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Baumol's cost disease

An economic phenomenon whereby costs continue to rise in sectors that experience no increase in labour productivity, leading to an ever-widening gap between costs and revenues.

This scenario was first proposed in a 1966 book by William J. Baumol and William G. Bowen entitled Performing Arts: The Economic Dilemma. The authors identified the issue of 'productivity lag' in the live performing arts, which differ from other industries in how productivity is measured. While most sectors strive to minimize the time required to produce a unit of output, in the performing arts, the labour of the performer is the output: putting on a Shakespearean play, for example, requires the same number of actors today as it did when it was first performed. Despite this inability to improve productivity, arts companies continue to raise salaries in order to remain competitive with other sectors. Baumol and Bowen predicted that they would eventually be forced to seek other sources of income as costs quickly eclipsed total revenues. At the same time, it is argued that rising per capita income can offset this gap in earnings to a substantial degree: demand for the arts goes up as individuals have more to spend, leading to greater ticket sales despite higher prices.

Note: While initially used to describe the performing arts, Baumol's cost disease has been applied to other industries affected by productivity lag, such as healthcare and education.

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