Application of Baumol’s Cost Disease to Public Sector Services: Conceptual, theoretical and empirical falsities

This paper argues that justifying lack of productivity improvements in public services by referring to Baumol’s Cost Disease (BCD) is conceptually confused, theoretically misspecified and empirically blind. BCD misconceptualizes public services as categorically distinct from manufactured goods and is based on a theory of productivity not directly applicable to many public services, therefore failing to recognize evidence of substantial scope for improving public services’ productivity. Analysis of the structural and behavioural unbundling of value creation and decomposition of professional skills in service provision leads this paper to conclude that public services are not as technologically non-progressive as BCD asserts.