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Baumol’s cost disease and the sustainability of the welfare state

Author

Listed:
  • Torben M. Andersen

    (Department of Economics and Business, Aarhus University)

  • Claus T. Kreiner

    (Department of Economics, University of Copenhagen)

Abstract

If productivity increases more slowly for services than for manufactured goods then services suffer from Baumol’s cost disease and tend to become relatively more costly over time. Since the welfare state in all countries is an important supplier of tax financed services, this translates into a financial pressure which seems to leave policymakers with a trilemma; increase taxes (and hence tax distortions), cut spending or redistribute less. Under the assumptions underlying Baumol’s cost disease, we show that these dismal implications are not warranted. The welfare state is sustainable and Baumol growth leaves scope for Pareto improvements.

Suggested Citation

  • Torben M. Andersen & Claus T. Kreiner, 2015. "Baumol’s cost disease and the sustainability of the welfare state," EPRU Working Paper Series 2015-02, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:epruwp:15-02
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    References listed on IDEAS

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    Cited by:

    1. Bergh, Andreas, 2016. "The Future of Welfare Services: How Worried Should We Be about Wagner, Baumol and Ageing?," Working Paper Series 1109, Research Institute of Industrial Economics.
    2. Corlet Walker, Christine & Druckman, Angela & Jackson, Tim, 2021. "Welfare systems without economic growth: A review of the challenges and next steps for the field," Ecological Economics, Elsevier, vol. 186(C).
    3. Lars-Erik Borge & Kjetil Hatlebakk Hove & Tobias Lillekvelland & Per Tovmo, 2018. "Cost disease in defense and public administration: Baumol and politics," Public Choice, Springer, vol. 175(1), pages 1-18, April.
    4. Torben M. Andersen, 2015. "The Nordic welfare model and welfare services - Can we maintain acceptable standards?," Economics Working Papers 2015-02, Department of Economics and Business Economics, Aarhus University.

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    More about this item

    Keywords

    : Public sector; Baumol cost disease; welfare state sustainability;
    All these keywords.

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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