There is a maxim in economics that increases in worker productivity tend to result in higher wages for workers. It makes some intuitive sense — if workers produce more goods per hour, thanks to a new technology, for example, companies can afford to pay them higher wages without passing higher costs on to consumers.
However, in the 1960s, an economist named William Baumol and his colleagues began exploring why wages also increase in industries that have not become more productive over time.
Consider the case of classical music: Gbenga Ajilore is an amateur bassoonist and professional economist who works on rural policy in Washington, D.C. He recently learned to play a Baroque piece called “Fanfare-Rondeau” by Jean-Joseph Mouret, written in 1729. (Fans of British television will recognize it as the “Masterpiece” theme.)
“So 1729, when this piece first came out, a bassoon player is going to be able to read the music, be able to play it and then play it within [an] orchestra or quartet or something like that,” Ajilore said.
We couldn’t find wage data for bassoon players in 1729, but let’s just say they earned a few shillings a week.
“So then fast forward 300 years, I’m going to be able to play that same music with the same instrument, with the same fingerings and … and produce the exact same song,” Ajilore said.
Even though the time and skill it takes to play that piece today is the same as it was in 1729, you cannot pay a 21st century bassoonist just a few shillings a week — he or she would simply get another job.
What economist Baumol realized is that the reason wages for professional musicians have increased over time even though “productivity” for those workers has not is competition for labor.
“In order to keep people in industries where the labor productivity is not going up, you have to match the wages in the ones where the labor productivity is going up,” said Ajilore.
That phenomenon became known as “the Baumol effect.” Productivity gains in some industries, like manufacturing, for example, spill over and increase wages in other industries. And it has implications far beyond music.
If you type “Baumol effect” into a search engine, one of the most common industries mentioned is education.
“So let’s say that people see that tuition is rising at post-secondary institutions, they will often immediately jump to the idea that this is the Baumol effect,” said Caroline Hoxby, a professor at Stanford University who studies the economics of education.
When you think about it, teaching is kind of like a live performance.
“You have professors like me, where what we do is advise Ph.D. students one on one and discuss the latest research,” Hoxby said. “Really, we’re probably not that much more productive than we’ve been in the past.”
However, colleges and universities have to compete for workers with other industries, like tech or finance, that have become more productive over time, so wages for professors go up.
But Hoxby said you can’t blame all tuition cost increases on Baumol.
“Some areas of education do not really have that much of the live performance aspect to them anymore, and in fact, are kind of going in the other direction,” she said.
Like online classes, for example, which make it easier for professors to teach thousands of students.
Economist/bassoonist Ajilore said that when thinking about where the Baumol effect applies and where it doesn’t, one big question is: “What does greater productivity mean?”
There are ways in which you could say that technology has even made musicians more “productive.”
In 1729, a quartet needed four individual musicians to play live. Today though, musicians can record themselves playing and distribute those recordings across the web.
Months ago, Ajilore recorded himself playing four separate parts of “Fanfare-Rondeau” and posted it on social media. You can watch it here, while he’s off doing something else.
“So in a way, I am more productive,” he said. It’s just that productivity isn’t always the point. “Sometimes you just want more arts and culture.”
You can bet that new technology is going to make a whole lot of industries way more productive in the coming years.
“Think of AI,” said Melissa Thomasson, an economics professor and associate dean at Miami University in Ohio.
Just the other day, she used ChatGPT to write a piece of code she rarely uses.
“I bet I saved a couple hours,” she said. “Think about how much code I could write because I didn’t have to struggle with trying to remember this arcane thing.”
What the Baumol effect tells us is that those productivity gains, which could push wages for knowledge workers higher, are likely to have spillover effects for all sorts of industries — even the ones that don’t use artificial intelligence.
