As AI Advances, Will Care Costs Soar? The Paradox of Prices [Deep Dive] | Dong-A Ilbo (KR) | 01KTZ81VP931CY09F4Q2GRYZZY

The paradox of modern economics is that as technology advances and productivity soars, the cost of essential services like elder care and haircuts seems to climb relentlessly. This counterintuitive trend is explained by the "Baumol Effect," a concept highlighting how productivity gains in some sectors can inadvertently drive up costs in others that remain labor-intensive.

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Are you worried about soaring prices? Even though your salary has increased, are you always short on living expenses? If so, you are not alone. People all over the world, including in the US and Europe, are having the same worries.

Over the last two decades, South Korea has witnessed significant wage growth, with average monthly wages rising by 85.3%, outpacing the consumer price index increase of 57.6%. This suggests an overall improvement in living standards. Yet, many consumers feel that their purchasing power hasn't kept pace. The reason lies in the stark contrast between the prices of mass-produced goods and services requiring human touch.

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The Baumol Effect explains the irony where service costs increase even as technology advances and productivity improves.

While manufactured items like ballpoint pens, jeans, and even large-screen televisions have seen their prices remain stable or decrease in real terms over 20 years, the cost of services has skyrocketed. For instance, a simple haircut that once cost under 20,000 won now exceeds that amount, and childcare services have nearly tripled. Similarly, the cost of a caregiver has risen dramatically, making it a significant financial burden for many families.

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In 1965, the labor required to perform a string quartet was the same as in 1865. That is, from an economic perspective, the productivity of a violinist has not improved at all.

Economist William Baumol first described this phenomenon in the 1960s. He observed that while technological innovation dramatically increases productivity in manufacturing, the productivity of service providers like musicians or caregivers remains largely unchanged. However, wages in these service sectors are often pulled up by the rising wages in more productive industries. This means that even without an increase in their own output efficiency, service workers command higher salaries, leading to increased service costs. The Baumol Effect, therefore, illustrates how technological progress can lead to a 'disease' of rising costs in sectors where human labor remains indispensable.

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The cost of a caregiver, which was 50,000-60,000 won per day 20 years ago, is now close to 150,000 won, making it a considerable burden.