"This would force the tax-base to expand a little faster than the rate of inflation, which would in-turn lead to growing fiscal difficulties."

I would like an explanation of why you think this is so. It seems to me that at present, the tax base is too low and we are living on an unsustainable regime of credit and more credit. We need the tax base to expand so that we may get out of this difficulty and in so doing, will have the necessary resources to provide the additional services which we will need in the future.

David

Peter

I don’t think you understand Baumol’s argument, or the nature of productivity growth and its relationship to wages.

The average level of wages growth is, in the long term, determined by the average level of productivity growth. The key word here is “average”. A bus driver or computer programmer in Australia may be no more productive than one in India, but their wages will be far higher because our average productivity, and therefore average wage, is much higher.

Productivity growth has always been faster in some industries than others. Production industries such as mining, manufacturing and agriculture typically have faster productivity growth in the long run than service industries (although in mining this has reversed dramatically in recent years). This results in output price growth being a bit faster for services than goods (in the past 20 years, Australian goods prices have risen on average by 2.3%pa, while services rose 3.4%pa). This is the basis of Baumol’s argument. This may mean that the share of some services in the economy diminishes over time - in the 1930s, about a third of employed women were in domestic service.

Most importantly, productivity gains are not impossible even in labour-intensive industries. Baumol ited a chamber orchestra, that he argued could be no more productive in the 1960s than it had been in the 1860s. But in fact TV and radio broadcasts, CDs and itunes allow the product of an orchestra to reach vastly more people, even though it still needs the same number of people to play a particular tune. In the aged care sector, opportunities for productivity growth through technological change may be less apparent than in general medicine, but they are still there. How many more people would be needed to provide aged care services if we still had 19th century pharmaceuticals, or laundry and cleaning techniques, for example.

Current Productivity measures do not count unpaid childcare and aged-care either.