The modern day example that really made Baumol click for me is child care, particularly day care. It’s a highly labor intensive with basically minimal opportunities for productivity enhancements (due both to regulation and parental preferences, as well as just baseline sheer human decency). As the rest of the economy becomes more productive, the relative cost of child care goes up and up and up - which is why we now see situations where two-earner households can an entire after-tax income consumed by child care costs once they need to put 2-3 kids into daycare.
Daycare economics are just brutal. It's insanely expensive to pay for, the caregivers make peanuts, and the owners are always at breakeven if they're not explicitly non-profit.
US Big City numbers. I'm generalizing, but these are broadly accurate.
- employees all-in-cost is ~$5000 per month paying $20-something an hour (they will be hitting OT as well, because they arrive before dropoff and stay after pickup). Typical maximum legal ratio might be 5 to 1 kids to carers depending on age. This means just for basic labor, every parent is paying $1000 a month.
- Next there is commercial rent. In a metro area, easily $5-$10k a month. Amortize that across 50 kids and that's another $200 a month.
- 2 meals + snacks daily. Adds in another $250 a month per kid assuming $11 per day per kid. More if you're prioritizing healthy fresh foods and not prepackaged garbage.
- Liability insurance which is very costly (insurers dont love cases involving dead or injured 3 year olds!)
- Utilities in a building that houses 50 people for 200+ hours a month.
- Throw in all the other costs. You have the admin costs of running a business like accounting and billing, and you've got to buy diapers, replace worn-out toys, and purchase endless crayons, and so on.
By the end of it all, you're looking at very slim margins working 55-hour weeks, your employees are paid barely more than a barista, and the parents are taking on a second mortgage with every kid.
Let's say 4 kids per carer, 10 hours per day, minimum wage of £12/hour, an overhead multiplier of 3 (to cover rent, maintenance, insurance, taxes, sickness cover, etc), and you get to £72 per day per child.
Or about £1,500 per month.
Now, you can increase that to 8 kids per carer with older kids, but that's really stretching things if you want to run at all smoothly.
One way to measure the cost of human capital (the major component of childcare) is by the opportunity cost of that time spent. In Baumol's Effect it's not so much productivity stagnation that is the problem, it's the fact that there are so many better opportunities (jobs or otherwise) for a potential childcare worker to invest their time into.
For one, a higher child-to-caregiver ratio. There may be others, but this seems to be the easiest lever to pull to eke out some productivity gains.
Personally, I’m completely fine with having this be the subject of regulation - even if it’s possibly an overly blunt instrument, this is not an area where I’d be comfortable letting the free hand of the market do its thing. Further, I suspect that universal, subsidized, high-quality pre-K would be a net economic benefit in the long run, but I haven’t done the research to back up this assertion.
In my city, the regulations specify a maximum # kids per adult. So if you were to devise a way to supervise more children per adult, using technology, you would still have to hire the same number of adults.
The regulations specify that teachers must have completed a certain number of units of a specific type of education. If you create an AI Assistant that means you can hire people with less training and have the same quality, then ... you cannot.
The regulations regulate inputs rather than outputs.
Well I think the regulations regulate outputs as well (if a child dies or is injured in daycare, there are regulations to handle that). The issue is that people aren't happy with settling for reactive punishments when something actually goes wrong.
