Rising Costs of Transit and Baumol’s Cost Disease

Abstract

This paper describes analysis of whether the public transit sector suffers from Baumol’s cost disease. The evolution of labor productivity and average labor costs across transit agencies in the United States was assessed compared with other industries. It was found that ( a) labor productivity in the transit sector was mostly stagnant over the period 1997 to 2013, more so in bus operations than in rail operations (0.0% and 0.7% average labor productivity growth rates, respectively), and even more so when output was measured as vehicle revenue miles rather than as passenger miles traveled; ( b) the transit sector was highly labor-intensive, because it represented on average 64% of total costs (operating and capital) for bus and 40% for rail; ( c) compensation per employee rose at a faster pace than inflation in 85% of the agencies analyzed; and ( d) compensation per employee rose at a faster pace than the average local wage rate in 65% of the agencies analyzed. These findings support the hypothesis that not only does the transit sector suffer from Baumol’s cost disease but also that additional factors contribute to spiraling labor costs. Although no antidote to the disease is clear, policy makers should recognize that, as the economy becomes more productive overall, it can continue to support growing levels of transit service in recognition of the growing external benefits, despite the sector’s inherently stagnant productivity growth.

Worse than Baumol's disease: The implications of labor productivity, contracting out, and unionization on transit operation costs

“…First, one of the main drivers of the soaring unit costs is lower labor productivity growth compared to wage growth above the inflation rate. Baumol's cost disease predicts this result but the effect in transit is even more pronounced because of the faster-than-the-average growth of transit wages (Morales Sarriera and Salvucci, 2016). Comparing our results to those in the literature, the magnitude of the Baumol variable coefficient for transit (roughly 0.55) is larger than that found by Colombier (2012) for the health care sector (between 0.16 and 0.20), in spite of our different estimation strategy: we use a Baumol variable that compares the differential between productivity growth and wage growth for each transit agency within the transit sector itself, while previous research has used a Baumol variable for the economy overall.…”

“…A few authors have argued that Baumol's cost disease also affects the transit sector, such as Zureiqat (2007), Evangelinos et al (2012), Gordon (2015), andMorales Sarriera andSalvucci (2016). The former explains that transit has limited potential for technological innovation, limited import substitutability (since operating labor must be hired locally), and is largely subsidized by the government, concluding that the implications of the disease also apply to transit.…”

“…Morales Sarriera and Salvucci (2016) performed an empirical analysis which found that labor productivity growth over the last two decades has been sluggish in the U.S. transit industry, close to zero for bus transit and lower than 1% per year for rail transit. Moreover, they found that the average compensation in the U.S. transit industry has been growing not only above the inflation rate, but also above the average compensation rate in the metropolitan areas in which they operate, outpacing the predicted rate of growth from a Baumol type analysis.…”