The Growth of Service Industries

The Growth of Service Industries

The Paradox of Exploding Costs and Persistent Demand

Edited by Thijs ten Raa and Ronald Schettkat

Problems arise if budgets for services are held constant whilst prices rise. Education, cultural activities and health services are under constant budgetary pressure. The authors argue that the price of commodities is linked to demand and price increases would therefore seem to threaten the very existence of these services. The paradox of these services is that in spite of their exploding costs, demand persists.

Chapter 1: Paradox of the services: exploding costs, persistent demand

William J. Baumol

Subjects: economics and finance, industrial economics, services


William J. Baumol1 Between 1981 and 1991 the University’s health insurance costs … increased by 635%. This rapid and continuing inflation parallels the experience of most employers in the nation … among [the] reasons … Doctors’ and hospitals’ charges for each procedure and operation increase each year at a rate that exceeds the rise in the cost of living. (Karen Bradley, Director of Personnel, New York University, Memorandum to the Staff, October 7, 1991.) There were twelve postal deliveries on weekdays in Kentish Town [then in suburban London] at that time [the 1860s] and one on Sundays. (Kapp (1972), p. 48n.) Three basic facts characterize the economic history of much of the service sectors of the world’s industrialized economies. First, the costs (and prices) of the services have been rising faster than those of other commodities, and have been doing so persistently and cumulatively as far back as the available statistical data go. Second, the amount spent on the services and their share of national income has also been rising persistently. And, third, so far as can be measured, the overall product of the service sector as a share of national income has remained more or less constant. That is, consumers have spent a larger and larger share of their incomes on those services, but the amount of service they received in return has just about kept up with the overall amount of other products they obtained.2 This roughly constant share of services output, together with their rapidly rising share of GDP...

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