Why Are The Prices So Damn High?

This provocatively named paper tries to understand why prices in healthcare, education, and a few other sectors have increased so much. The focus is on the US but I believe the results hold for other developed countries too.

The central idea is the Baumol effect, which is simple but not very intuitive. Here's my attempt at interpreting it:

• First, we must note that prices have risen primarily in sectors with low productivity growth; i.e., sectors where output per worker hasn't increased much over the past few decades. E.g., number of students in a course taught by a professor in a university hasn't changed much over the last 50 years.
• Prices in these sectors is rising because wages in these sectors are rising. These sectors are all very labour intensive, so wages contribute a lot to prices.
• Wages are rising in these sectors because wages are rising in other sectors, like technology, farming, manufacturing, etc. The opportunity cost for someone working in education is higher now; if they could get $50,000 / year working in manufacturing, technology, or farming, they might not be willing to settle for $30,000 / year at a university.
• Wages are rising in the other sectors because productivity is rising in the other sectors. E.g., one worker on a farm can now produce more eggs than they could before. But because productivity is rising in these sectors, prices of eggs don't rise inline with wages.
• So, to summarize: Prices rise in non-productive sectors because of the rising opportunity cost of labour due to rise in wages in productive sectors.