The Paradox of Exploding Costs and Persistent Demand
Edited by Thijs ten Raa and Ronald Schettkat
Thijs ten Raa and Ronald Schettkat The surprising vigour of the service sector puzzles policy makers and economists alike. Policy makers struggle with the question of whether they should put a lid on public service budgets as the costs of their provision rise. Economists are puzzled by the interplay of slow service and fast goods productivity growth and wonder why the demand for services is so persistent. This book is intended to address both readerships and serves as a useful introduction to service productivity analysis. Services such as education, cultural activities, and health services are under budgetary pressure. If budgets for services are held constant, but the prices go up, there is a problem. The very existence of some services is under threat. Many economists take this as a fact of life. In their view, if commodities become more expensive, there will be less demand. What is puzzling, however, is that services do not become more costly because their provision becomes less efﬁcient. In a seminal article Baumol (1967) diagnosed the ‘disease’ of the services as a lagging of productivity growth, compared to manufacturing. The success of technical progress in industry makes manufactured goods ever less expensive and thus increases the relative price of services, however unintentionally. Services do not require increasing quantities of resources, but the same amount of resources able to generate ever increasing quantities of manufactured goods is needed to produce services. The absolute resource cost of services does not go up, but the opportunity cost...