Predicting the Future: Baumol Cost Disease Edition

In one of my first posts on this blog, I discussed a possible method for curing Baumol’s cost disease: turn services into goods. For those of you who didn’t read that post, Baumol’s cost disease describes the situation where wages rise in industries that do not experience productivity growth to remain competitive for labor with industries that do experience productivity growth. Most commonly, the industries that are affected by Baumol’s cost disease are service-based and rely heavily on non-routine labor.

Baumol’s cost disease has yet to vanish from the economy since I detailed the cure, so I think we can safely assume it will be with us for the foreseeable future. As labor costs rise in sectors of the economy that do not increase worker productivity, we should expect to see less production from those sectors (companies cannot raise prices indefinitely to account for increasing labor costs). A simple example that we have already seen is the decline of live theater performances. Outside of New York City, plays and musicals are rarely produced as profit-seeking ventures. Based on the implications of Baumol’s cost disease, I want to make a few predictions of my own about the economy:

1. All men’s haircuts will be buzz cuts. Barbers do quintessentially non-routine work when they cut people’s hair. Every head of hair is unique in some way and people have distinctly heterogeneous preferences about what hairstyles look good. In the future, however, they won’t be able to afford such stylish hairdos. As barbers’ wages increase to keep up with the wage increases in, say, the automobile assembly industry, a barber’s time will become more expensive to rent out. At some point, most budget-conscious men will opt for the buzz cut to avoid paying a hundred bucks for the Bieber.

2. Your waiter will be an iPad. Among the most innovative companies in the restaurant industry over the past few years are Chipotle and Chop’t. What’s their secret? They deliver sit-down quality food at near-fast food prices. They are only able to do this by maximizing efficiency and cutting out the waitstaff. They still have cashiers though, and the next logical innovation step will be replacing them with iPads. Look for this change to happen at restaurants all across the cost spectrum, not just at the assembly line fast food joints. Now that socially acceptable tipping has creeped int the fifteen to twenty percent range, isn’t it time we brought in the computers? They don’t forgot drink orders and they definitely won’t spit in your food.

3. You won’t have a mailbox. Alright, this one is a little easy to predict, considering the United States Postal Service is losing $25 million dollars a day and is currently the largest employer in the U.S. At a certain point those labor costs were bound to sink the post office. Coupled with the rise of email, texting, and Facebook, the decline in mail volume should spark a major restructuring of the USPS. Among likely changes, guaranteed mail delivery to rural areas, which are more expensive to service on a per capita basis than urban ones, will come to an end. As some people begin to lose mail service entirely, network effects will start operating in reverse. As fewer people have mailboxes, it becomes less necessary to have a mailbox yourself.

4. Your banker will be your smartphone. I already wrote a full-length post about the coming revolution in the banking industry, but here’s the gist: it no longer makes sense for banks to provide services through full-service branches. Smartphone apps, point-of-sale machines, and third-party outlets can delivery the vast majority of banking services without incurring the costs of building, staffing, and maintaining brick-and-mortar bank branches. Tellers haven’t become drastically better at counting money over the past few decades (low productivity increase), but their wages have had to rise as the wages in other industries have gone up. In the near future, banks will replace their employees with the smartphone in your pocket.

There are many more predictions that could be made based on extrapolations of Baumol’s cost disease, but I’ll leave it at four. If you have any predictions of your own, please share them in the comments below.


One thought on “Predicting the Future: Baumol Cost Disease Edition”

  1. Would the barbers wages have increased if he weren’t protected by his passport? If people from around the world could migrate everywhere freely, baumol’s disease would vanish. Only the truly productive would enjoy real wage growth.

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