Baumol’s cost disease and urban transport services in Latin America

According to Baumol’s Cost Disease in some productive activities that are labor intensive and where labor saving technological change is low or absent, labor productivity tends to be stagnant. However, since these sectors compete for the same inputs, their wage bill increases according to the average productivity growth in the economy. As a consequence, production in stagnant sectors becomes more expensive relative to that of others. Examples of sectors affected by Baumol’s disease include the performing arts, health, education and some public services. Some recent literature for developed countries suggests that public transport is also affected by the cost disease. In this article we present similar evidence suggesting that Baumol’s cost disease might be present in transit services in several cities from four Latin American countries, with consequences in terms of costs and productivity that are probably made worse by rising urban congestion. We also analyze to what extent technical progress and gains in aggregate efficiency can offset the consequences of Baumol’s cost disease. Finally, we discuss policy options to overcome these problems, refer to some possible limitations of our analysis and propose avenues for future research.