Or Baumol Effect. I had never heard of it until today. Because all prices are relative, if the price of something goes down...No, I am not going to dare explain it. I am reading a paper by Alex Tabarrok from Marginal Revolution and keep thinking I understand it, but the next page reveals that I probably don't. I really thought I had it when I grasped that when productivity improves in one facet of building a house, the wages go up even in areas that have not improved, because they are now the bottleneck that prevents the houses from being finished. But I think I am oversimplifying, as I am told it applies more strongly to services than to manufactured goods.
It was recommended to me as explaining a great deal about economics, as it is a principle that works across countries, across industries, and across time. It is independent of regulation, though regulation keeps trying to correct it.
So have at it, with my blessing. I'm going to try something else.
1 comment:
It sounds like a set-up for a temporary monopoly resulting from a bottleneck. If employers have to pay more than workers are naturally worth for a product that hasn't become more valuable for buyers, the pressure will mount to find a workaround. It might take the form of automation, or perhaps an alternative product to wire around the bottleneck. Monopolies do raise prices in counterintuitive ways, but that's why they're not stable, as long as we don't panic and subsidize them for fear of upsetting job expectations. Nothing beats productivity in the long run.
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