<p>When comparing industries it is almost intuitive that a relative productivity increase causes a relative price decrease in the absence of anything else happening. The reason it is intuitive is that all the competitors within the same industry probably benefit from the same productivity increase so together you can all raise prices slowly or not at all or decrease prices. </p>

<p>You might be looking for the Baumol effect. Wikipedia says...</p>

<blockquote>
  <p>The rise of wages in jobs without productivity gains is from the
  requirement to compete for employees with jobs that have experienced
  gains and so can naturally pay higher salaries, just as classical
  economics predicts. For instance, if the retail sector pays its
  managers 19th-century-style salaries, the managers may decide to quit
  to get a job at an automobile factory, where salaries are higher
  because of high labor productivity. Thus, managers' salaries are
  increased not by labor productivity increases in the retail sector but
  by productivity and corresponding wage increases in other industries.</p>
</blockquote>

<p>According to this, a necessary condition for the Baumol effect is competition between industries for resources. </p>

<p><a href="https://en.wikipedia.org/wiki/Baumol&#39;s_cost_disease" rel="nofollow noreferrer">This is the relevant link.</a></p>

CC BY-SA 4.0
2019-10-08T22:20:47.340Z
2019-10-08T22:20:47.340Z
H2ONaCl
<p>As @H2ONaCl correctly points out the mechanism that you mention can be well described by "Baumol's cost disease" mechanism associated perhaps most clearly with this 1966 article </p>

<blockquote>
  <p>William J. Baumol and William G. Bowen, “On the Performing Arts: The
  Anatomy of their Economic Problems.” The American Economic Review, Vol. 55,
  No. 2, 1965, pp. 495-502</p>
</blockquote>

<p>and a book with a similar title.  </p>

<p>However credit for the idea that differential productivity between sectors will affect relative prices and other phenomena should be shared more broadly with other economists. In trade theory for example the <a href="https://en.wikipedia.org/wiki/Balassa%E2%80%93Samuelson_effect" rel="nofollow noreferrer">Balassa-Samuelson effect</a> (described in papers published at about the same time or earlier) uses the mechanism to explain why the cost of living in developed countries is higher than in less developed countries:  the productivity difference between workers in non-traded (NT) sectors (think haircuts, meal preparation, child care, many types of construction) is not that much higher in rich countries compared to poor countries but rich country workers are much more productive in tradable (T) sectors.  The higher tradable sector productivity drives up the wage in both T and NT sectors and hence also the price of non-traded goods and the cost of living there.    </p>

<p>Authors <a href="https://core.ac.uk/download/pdf/7370284.pdf" rel="nofollow noreferrer">Tica and Druzic</a> argue in fact that the differential productivity mechanism had been explained already at least as early as Ricardo's 19th century <em>Principles of Political Economy and Taxation</em> and by several early 20th century economists before being 'rediscovered' by Balassa, Samuelson, Baumol and others.</p>

CC BY-SA 4.0
2019-10-14T15:55:02.390Z
2019-10-14T15:55:02.390Z
JHuw
<p>I read a couple of years ago that in the long run (in centuries) the relative price between, say, schooling and agriculture keeps increasing, since the latter sector gets more and more productive, while there are barely any productivity gains in schooling.</p>

<p>I couldn't find literature that talks about it.  What is the name of this mechanism, or related literature? </p>

<reference-request><productivity><economic-history>
Persistent changes in relative prices due to productivity differences
Chris tie
# Persistent changes in relative prices due to productivity differences

(Asked by: username_0 on 2019-10-08)

I read a couple of years ago that in the long run (in centuries) the relative price between, say, schooling and agriculture keeps increasing, since the latter sector gets more and more productive, while there are barely any productivity gains in schooling.

I couldn't find literature that talks about it. What is the name of this mechanism, or related literature?

**Tags:** reference-request, productivity, economic-history

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## 2 answers

### Answer by username_1 on 2019-10-08. Score: 1 | Accepted answer

When comparing industries it is almost intuitive that a relative productivity increase causes a relative price decrease in the absence of anything else happening. The reason it is intuitive is that all the competitors within the same industry probably benefit from the same productivity increase so together you can all raise prices slowly or not at all or decrease prices.

You might be looking for the Baumol effect. Wikipedia says...

> The rise of wages in jobs without productivity gains is from the
> requirement to compete for employees with jobs that have experienced
> gains and so can naturally pay higher salaries, just as classical
> economics predicts. For instance, if the retail sector pays its
> managers 19th-century-style salaries, the managers may decide to quit
> to get a job at an automobile factory, where salaries are higher
> because of high labor productivity. Thus, managers' salaries are
> increased not by labor productivity increases in the retail sector but
> by productivity and corresponding wage increases in other industries.

According to this, a necessary condition for the Baumol effect is competition between industries for resources.

[This is the relevant link.](https://en.wikipedia.org/wiki/Baumol's_cost_disease)


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### Answer by username_2 on 2019-10-14. Score: 1

As @H2ONaCl correctly points out the mechanism that you mention can be well described by "Baumol's cost disease" mechanism associated perhaps most clearly with this 1966 article

> William J. Baumol and William G. Bowen, “On the Performing Arts: The
> Anatomy of their Economic Problems.” The American Economic Review, Vol. 55,
> No. 2, 1965, pp. 495-502

and a book with a similar title.

However credit for the idea that differential productivity between sectors will affect relative prices and other phenomena should be shared more broadly with other economists. In trade theory for example the [Balassa-Samuelson effect](https://en.wikipedia.org/wiki/Balassa%E2%80%93Samuelson_effect) (described in papers published at about the same time or earlier) uses the mechanism to explain why the cost of living in developed countries is higher than in less developed countries: the productivity difference between workers in non-traded (NT) sectors (think haircuts, meal preparation, child care, many types of construction) is not that much higher in rich countries compared to poor countries but rich country workers are much more productive in tradable (T) sectors. The higher tradable sector productivity drives up the wage in both T and NT sectors and hence also the price of non-traded goods and the cost of living there.

Authors [Tica and Druzic](https://core.ac.uk/download/pdf/7370284.pdf) argue in fact that the differential productivity mechanism had been explained already at least as early as Ricardo's 19th century *Principles of Political Economy and Taxation* and by several early 20th century economists before being 'rediscovered' by Balassa, Samuelson, Baumol and others.


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