Baumol's cost disease (also known as the Baumol Effect) is a phenomonon discovered by William J. Baumol and William G. Bowen in the 1960s. The original study was conducted for the performing arts sector. Baumol and Bowen pointed the same number of musicians are needed to play a Beethoven string quartet today as were needed in the 1800's; that is, the productivity of Classical music performance has not increased. William Baumol (born February 26, 1922) is a New York University economics professor who has written extensively about labor market and other economic factors that affect economy. ... William G. Bowen is the current president of the Andrew W. Mellon Foundation. ...

In a range of businesses, such as the car manufacturing sector and the retail sector, workers are continually getting more productive due to technological innovations to their tools and equipment. In contrast, in some labor-intensive sectors that rely heavily on human interaction or activities, such as nursing, education, or the performing arts there is little or no growth in productivity over time. As with the string quartet example, it takes nurses the same amount of time to change a bandage, or college professorts the same amount of time to mark an essay, in 2006 as it did in 1966.

Baumol's cost disease is often used to describe the lack of growth in productivity in public services such as public hospitals and state colleges. The desirable range of student-teacher or patient-nurse ratios puts a limit on the increase of productivity. To lower the price of education or hospital care, one would have to lower the quality of the service provided.

Since many public administration activities are heavily labor-intensive, there is little growth in productivity over time. As a result, the costs of the bureaucracy will inflate quicker than the growth in the GDP.

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