Baumol\’s Cost Disease

That\’s the basic thought behind this argument:

In line with the government\’s 2% inflation target, the Treasury\’s assumption is that productivity in the economy as a whole will rise at 2% a year and pay at an average of 4%. Hence, if pay in the public services is to remain competitive with that outside, it must rise on average by about 4% a year. So to be able to afford the same number of staff in any particular service, expenditure also needs to go up by 4% a year – a \”real increase\” of 2%. The problem for services, such as health and education, and for the armed forces, is that they need such a \”real increase\” to keep the same number of staff to maintain existing standards, because there is little or no room for improving productivity.

Average wages are determined by average productivity. Thus, given that productivity in services is more difficult to improve than it is in manufacturing, services will inevitably become more expensive relative to manufactures over time.

All entirely true, but it doesn\’t quite lead to that argument being true as stated.

The reason being that productivity in services is merely more difficult to improve, not impossible. Only if you say that a near monolothic organisation of 1.4 million people is the most efficient manner of delivering health care to 60 million people can you say that the NHS productivity cannot be improved. And that certainly ain\’t an argument I\’m going to try and make.

One obvious method of improving efficiency would be to abolish national pay bargaining…..but no one has the balls to try that as yet unfortunately.

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