Productivity growth in Europe: is Baumol cost disease an explanation?

This paper examines the existence and extent to which the “Baumol cost disease” could have affected aggregate growth in Europe. This would arise if lower productivity sectors began to account for an increasing share of output which would then put downward pressure on the prospective growth rate of aggregate productivity (Baumol, 1967 & 2012). This has reemerged as a potential issue of policy concern in the light of an aging population structure increasing demand for comparatively lower-productivity services such as health and social care. Our results show that although there is some evidence of the patterns suggested by Baumol, particularly in relation to price developments in lower productivity sectors, that these have not (to date) been substantial enough to generate a drag on overall productivity growth across Europe.