Followup on the Baumol Effect: Thanks, O Baumol - a podcast by Jeremiah

Last week I reviewed Alex Tabarrok and Eric Helland’s Why Are The Prices So D*mn High?. On Marginal Revolution, Tabarrok wrote:

SSC does have some lingering doubts and points to certain areas where the data isn’t clear and where we could have been clearer. I think this is inevitable. A lot has happened in the post World War II era. In dealing with very long run trends so much else is going on that answers will never be conclusive. It’s hard to see the signal in the noise. I think of the Baumol effect as something analogous to global warming. The tides come and go but the sea level is slowly rising

I was pretty disappointed by this comment. T&H’s book blames cost disease on rising wages in high-productivity sectors, and consequently in education and medicine. My counter is that wages in high productivity sectors, education, and medicine are not actually rising. This doesn’t seem like an “area where you could have been clearer”. This seems like an existential challenge to your theory! Come on!

Since we’re not getting an iota of help from the authors, we’re going to have to figure this out ourselves. The points below are based on some comments from the original post and some conversations I had with people afterwards.

1. Median wages, including wages in high-productivty sectors like manufacturing, are not rising

I originally used this chart to demonstrate:

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