In the chart shown we see the price changes in goods and services in the United States from 1997-2017, measured as the percentage price change since 1997. Positive values indicate an increase in prices since 1997, and negative values represent a price decline. Here we see a distinct divide between consumer durables and technologies (which have typically seen a price decline), and service-based purchases (which have increased in price).
A combination of industrial offshoring, technological innovation and economies of scale have resulted in a price decline in goods such as televisions (-96% since 1997), software (-67%), toys (-69%), and clothing (-4%). In contrast, the prices of goods and services such as education, childcare, medical care, and housing have increased significantly, rising by 150%, 110%, 100% and 58%, respectively.
The observed rise in costs of services may be partly attributed to the so-called ‘Baumol’s cost disease‘, which is an important exception from the general regularity that the pay for labor – the wage – reflects the productivity of labor. Baumol’s cost disease describes the phenomenon whereby wages rise in jobs which have experienced little improvements in labor productivity in order to compete with salaries in other sectors.
Examples of service-based roles such as nursing, healthcare, childcare and education have experienced little productivity growth relative to manufacturing sectors which have seen continued improvements through technological innovation. In order to retain employees in service-based roles, salaries have risen in order to remain competitive with industrial sectors; this increase in pay has occurred despite minimal gains in productivity. This may in part explain why the cost of education, healthcare and other services have risen faster than the general rate of inflation.