Productivity Gaps and 'Cost Illness' : Contributions and Limits of William J. Baumol's Unbalanced Growth Model

The aim of this paper is to analyse Baumol's unbalanced growth model, developped in 1967 and revisited in 1985. This model focuses on the impact on employment and on growth of a productivity gap between a 'progressive' and a 'stagnant' sector of an economy. In this paper, we discuss the propositions and assumptions of Baumol's model, as well as its current relevance, given the recent developments of the service sector. In particular, one of Baumol's propositions states that 'stagnant' activities (i.e. most of the service industries) that suffer from 'cost disease' will eventually be driven out of the market. We argue that the model does not prove this