Baumol’s Cost Disease and What it Means to You

When I went college it cost roughly $5,000 a year for tuition and books (yes, it was a state school). The same school now costs about $8,000 a year. My guess is that the education hasn’t changed much materially but the cost has increased roughly 60%. Why is this the case?

Baumol’s Cost Disease  – in short – a rise of cost with little corresponding increase in productivity

Many people, wrongly in my assumption, have turned to education as a way to punt on these ‘hard economic times’. They have chosen to stay in school or go back to school in search for greener pastures that they assume will be there after graduation. This has led to a surge in demand causing a material increase in the cost of education while the quality in education has remained constant and/or declined due to the volume/quality argument.

So how this applies to me – a sales/marketing guy peddling my wares.

I sell cloud services to the accounting profession. As you know the cloud and technology are sorda a big deal thus causing the demand for qualified IT people to rise. This is both good and bad news to my organization.

Bad news: The cost for talent, both in finding and retaining, will rise. Despite hard economic times more and more companies see the increase in production via the gains through good/excellent IT systems. People still create systems last I checked.

Good news: The people/firms I sell to will have a hard time affording IT talent needed to run their operation well. The production increase through the individual will not materially increase but market prices will climb higher causing non-IT organizations a stomach ache when the inevitable comes their way. Their decision’s look like this:

  1. retain IT person and pay them what the market demands
  2. hire a less talented IT person and roll the dice
  3. hire an outsourced company to worry about the cost centers and make the shift
  4. do nothing
Baumol’s cost disease impacts you unless you live in a communist country. Think about how it applies to what you are doing and/or your career path.

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