The Impact of Slow Productivity on Healthcare Costs in a No-Growth: An Empirical Analysis

Abstract

This study investigates whether the healthcare sector is vulnerable to Baumol’s cost disease in the context of a no-growth economy. Baumol’s model suggests that sectors with stagnant productivity are subject to rising wages that outpace productivity growth, leading to increasing costs. However, in a no-growth economy where overall income remains constant, it is unclear whether this dynamic would still hold. The study explores two institutional scenarios: selective reduction of productivity and a reduction in working hours. In both scenarios, the findings suggest that Baumol’s cost disease does not directly impact the healthcare sector. However, the second scenario—reducing working hours—reveals a significant outcome. Given the slow productivity growth typical of the healthcare sector, maintaining the same level of service will require a larger workforce over time. Consequently, the relative cost of healthcare is expected to rise steadily. This result implies that even though the healthcare sector may not experience Baumol’s cost disease in the traditional sense within a no-growth economy, the sector will still face increasing relative costs. The need for more workers to sustain healthcare services as productivity growth lags behind other sectors will drive these cost increases. Baumol’s cost disease may not directly afflict the healthcare sector in a no-growth scenario, the study finds that the relative cost of healthcare will likely continue to rise due to the increasing demand for labor. This highlights the importance of considering long-term strategies to manage healthcare costs, even in the absence of economic growth, to ensure the sustainability of the sector and the affordability of healthcare services.