"But the growing centrality of education and health care is not only a function of public preferences and demand. Another important factor, especially to the two sectors' growth within the labor market, is the fact that it is more difficult to squeeze labor costs out of those industries than it is in, say, manufacturing or agriculture. After all, most factory work does not require deep knowledge or complex judgment. As a result, engineers are constantly developing machines that can substitute for humans in manufacturing. Furthermore, as countries like China and India become more integrated into the global economy, an ever-larger pool of low-skill labor becomes available. The need for manufacturing labor in the United States is therefore reduced; the relative cost of manufacturing output is thus held down.
Compared to manufacturing, the delivery of services in education and health care today is relatively labor intensive. Teachers and doctors require much more training than do manufacturing workers. Everyday work in education and health care generally involves more judgment and complex decision-making than are required on a production line. These higher-level tasks are not as easily handed over to machines or outsourced to low-skilled workers abroad.
Education and health care are also more resistant to the productivity increases that have dramatically altered the manufacturing sector. Factory automation, for instance, can swiftly raise the number of widgets produced per worker; office automation has vastly streamlined supply-chain management, inventory control, and accounting. But increasing the number of operations per surgeon, or the number of essays graded per teacher, is much more difficult. Hence, productivity growth in health care and education lags behind that in other industries.
As a rule, this means that health care and education tend to be less efficient. As increased productivity has led to wage growth in other, more efficient industries, the inefficient sectors must maintain competitive wages. But without the commensurate productivity gains, they experience cost growth, an effect named "Baumol's Cost Disease" (after the economist William Baumol, who identified it in the 1960s).
Baumol's famous illustration of this phenomenon compared classical musicians with auto workers. It takes just as many musicians to play one of Mozart's symphonies today as it did a half-century ago, but it takes far fewer auto workers to produce a car now than it did then. As a result, manufacturing has become much more efficient — employing fewer people, but paying each of them somewhat more. Orchestras can't employ fewer people, but they do have to pay each of their employees more than they used to — if only to keep up with the rest of the economy, lest their musicians run off to become auto workers.
The result is that, over time, costs in less efficient industries — like the fine arts, but also health care and education — will increase in relation to costs in more efficient industries. And these increasing costs, as well as rising demand for the services these sectors offer, have combined to place both education and health care at the commanding heights of today's economy.
If it were true only that health care and education are increasingly important sectors of our economy, there would be little cause for concern. Indeed, societies ought to desire economies that are strong and flexible enough to hum along as new technologies and other developments cause industries within them to rise and fall. The problem, rather, is that both health care and education are increasingly government-dominated industries. And this domination produces two ill effects that exacerbate the changes these sectors are already undergoing: Government's influence artificially increases the demand for health care and education (by significantly subsidizing both), and it makes both sectors even less efficient than they would be otherwise (by heavily regulating them and shielding them from market forces)." - The New Commanding Heights, Kling and Schulz, National Affairs, Summer 2011
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