Why are health and education costs exploding? Clues from Long Run Relative Prices

This isn’t the prettiest chart I’ve ever made, but it’s quite important. It shows that health  (shades of blue) and education (green) prices have increased nearly 7X more than durable goods prices (reddish colors) since early 1980s. This massive increase in relative prices (e.g. the price of health in terms of durable goods) is likely due at least in part to productivity growth differences across sectors (Baumol’s cost disease). The number of people we need to produce one durable good today is much smaller than it was in 1980, while the number of teachers it takes to teach 20 students is roughly the same as it was in 1980. In this setting, there will be way more durable goods per unit of education, so the relative price of durable goods will go down (since durable goods will be abundant and education will be relatively scarce). There are clearly other factors influencing heath and education prices, but I think productivity differences are an important part of the story why health and education are becoming more expensive.

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