Baumol's cost disease in the service sector is primarily caused by low productivity growth, leading to rising costs despite increasing demand.
Baumol's cost disease arises in a service sector when the sector experiences low productivity growth. This occurs because in service sectors, productivity tends to increase at a much slower rate compared to manufacturing sectors, leading to increasing costs.
For example, in healthcare or education where automation and efficiency gains are limited, costs tend to rise even if the demand grows. This phenomenon is known as Baumol's cost disease.
In contrast, if the service sector experiences high productivity growth, it would not be affected by Baumol's cost disease as the efficiency gains would offset cost increases.
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