The economic principle that productivity gains lead to higher wages seems straightforward. However, economist William Baumol's observations challenge this notion by exploring wage increases in industries where productivity has not improved over time. This phenomenon, known as the Baumol effect, highlights how competition for labor across different sectors can drive wage growth even in less productive industries. The implications of this effect extend far beyond music, influencing sectors like education and technology.

Understanding Wage Growth Without Productivity Gains

The Baumol effect reveals that industries with stagnant productivity can still experience wage increases due to external pressures. For instance, classical musicians today earn significantly more than their 18th-century counterparts, despite playing the same pieces with similar instruments. The reason lies in the competition for skilled labor from other sectors that have seen productivity improvements. To retain talent, less productive industries must match wages offered by more productive ones.

To delve deeper into this concept, consider the case of a professional bassoonist performing a Baroque piece composed in 1729. Despite no change in the time or skill required to play this music, modern bassoonists command much higher wages. Economist Gbenga Ajilore explains that this wage increase is driven by the need to compete with other industries where productivity has risen. If musicians were paid merely a few shillings per week, they would likely seek employment elsewhere. Thus, the Baumol effect ensures that wages in less productive sectors remain competitive, maintaining a balance in the labor market.

Implications of the Baumol Effect in Modern Industries

The Baumol effect extends its influence beyond music, impacting sectors such as education. In academia, professors' wages have increased over time, not necessarily because teaching methods have become more efficient, but due to competition from industries like tech and finance. Professors must be compensated competitively to prevent them from leaving for better-paying jobs. However, not all areas of education are affected equally; online courses, for example, have introduced new efficiencies that reduce costs.

Economist Caroline Hoxby notes that while some aspects of education resemble live performances—such as one-on-one advising—the introduction of technology has transformed other areas. Online platforms allow professors to reach thousands of students simultaneously, increasing productivity in certain dimensions. Yet, the core essence of personalized instruction remains largely unchanged. The Baumol effect underscores the importance of considering what constitutes productivity in different contexts. For instance, technology enables musicians to record multiple parts of a composition, enhancing their "productivity" in ways that were unimaginable centuries ago. As AI and other technologies continue to advance, the spillover effects on wages will likely spread across various industries, even those not directly benefiting from these innovations.