"The growing importance of services has led to significant structural change in advanced economies, with the service sector now accounting for the largest share of employment in developed countries. In his seminal model of the so-called cost disease of services, William Baumol noted that the prices of services, especially in health, education, arts and culture, tend to rise faster than the prices of material goods. Central to his model is the disparity in labour productivity growth rates between stagnant and progressive sectors. Baumol's model sheds light on the reasons behind the rising cost of services and provides a deeper understanding of its economic consequences. This article argues that Baumol's model of the cost disease of services retains its explanatory power and relevance today. It refutes criticisms that productivity growth in services is mismeasured and underestimated and that the increasing importance of services as inputs in manufacturing renders Baumol's model irrelevant. Instead, the article argues that Baumol's model can highlight the overlooked consequences of rising income inequality, particularly the severe impact of the cost disease, which disproportionately affects the poorer segments of the population."

Support: Digital