Productivity and costs in the transit sector : the impact of Baumol's cost disease

TitleProductivity and costs in the transit sector : the impact of Baumol's cost disease
Publication TypeThesis
Year of Publication2016
AuthorsJavier Morales-Sarriera
Academic DepartmentDepartment of Civil and Environmental Engineering
DegreeMaster of Science in Transportation
Date Published06/2016
UniversityMassachusetts Institute of Technology
CityCambridge, MA

This thesis covers several topics related to transit costs, productivity, efficiency, and benefits. We first show that labor productivity growth among transit agencies in the United States is slow or stagnant, and it is significantly lower than productivity growth in most industries. According to Baumol's cost disease theory, this leads to a spiraling trend in cost escalation over time and it is a threat to long run financial sustainability. In fact, we find that transit costs increase not only above the inflation rate but above the rate predicted by Baumol's theory, which is evidence of additional compounding factors, such as the bargaining power of labor unions, and political or managerial issues. First, we extend the analysis to calculate total factor productivity, and the results validate the findings of sluggish labor productivity growth. The calculations also reveal that while productivity may grow with efficiency gains, these gain are bounded by a frontier, and, in the long run, the inherent nature of low productivity growth in the transit sector will continue to drive transit costs faster than other sectors. We also assess whether contracting out transit operations alleviates the implications of Baumol's cost disease, and the results show that in spite of lower average costs, contracted service also has significant cost escalation over the long run, evidence that the implications also apply to the private delivery of transit service. In addition, we also consider other sectors within the larger transportation industry and analyze whether productivity and costs follow the same pattern predicted by Baumol's cost disease. The results vary widely, from vehicle maintenance on the one hand (with low productivity growth and high cost increase) to automobile manufacturing on the other hand. The transit construction industry also shows signs of Baumol's cost disease, but not as severe as those for transit operations. Finally, despite the spiraling nature of transit costs, we also show that the internal and external benefits of transit tend to grow over time, which can justify higher fares and additional subsidy. Although there is no clear antidote to Baumol's cost disease, policymakers should recognize that as the economy becomes more productive and prosperous overall, it can continue to support growing levels of transit service in recognition of its growing external benefits, despite its inherent nature of stagnant productivity growth.