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.