In economics, the Baumol effect, also known as Baumol's cost disease, first described by William J. Baumol and William G. Bowen in the 1960s, is the tendency for wages in jobs that have experienced little or no increase in labor productivity to rise in response to rising wages in other jobs that did experience high productivity growth. In turn, these sectors of the economy become more expensive over time, because the input costs increase while productivity does not. Typically, this affects services more than manufactured goods, and in particular health, education, arts and culture.

This effect is an example of cross elasticity of demand. The rise of wages in jobs without productivity gains results from the need to compete for workers with jobs that have experienced productivity gains and so can naturally pay higher wages. For instance, if the retail sector pays its managers low wages, those managers may decide to quit and get jobs in the automobile sector, where wages are higher because of higher labor productivity. Thus, retail managers' salaries increase not due to labor productivity increases in the retail sector, but due to productivity and corresponding wage increases in other industries.

The Baumol effect explains a number of important economic developments:

Baumol referred to the difference in productivity growth between economic sectors as unbalanced growth. Sectors can be differentiated by productivity growth as progressive or non-progressive. The resulting transition to a post-industrial society, i.e. an economy where most workers are employed in the tertiary sector, is called tertiarization.

Increases in labor productivity tend to result in higher wages. Productivity growth is not uniform across the economy, however. Some sectors experience high productivity growth, while others experience little or negative productivity growth. Yet wages have tended to rise not only in sectors with high productivity growth, but also in those with little to no productivity growth.

The American economists William J. Baumol and William G. Bowen proposed that wages in sectors with stagnant productivity rise out of the need to compete for workers with sectors that experience higher productivity growth, which can afford to raise wages without raising prices. With higher labor costs, but little increase in productivity, sectors with low productivity growth see their costs of production rise. As summarized by Baumol in a 1967 paper:

If productivity per man hour rises cumulatively in one sector relative to its rate of growth elsewhere in the economy, while wages rise commensurately in all areas, then relative costs in the nonprogressive sectors must inevitably rise, and these costs will rise cumulatively and without limit...Thus, the very progress of the technologically progressive sectors inevitably adds to the costs of the technologically unchanging sectors of the economy, unless somehow the labor markets in these areas can be sealed off and wages held absolutely constant, a most unlikely possibility.

Studying various price series over time, Jean Fourastié noticed the unequal technological progress in different industries.