Testing Baumol’s Cost Disease in Tourism: Productivity, Prices, and Labour Costs in Selected EU Countries Post-COVID

This paper investigates the impact of the transition from manufacturing to tourism on sectoral inflation and labor costs. Using panel data econometric models for 15 selected EU countries from 2011 to 2023, the study confirms key dynamics predicted by Baumol’s Cost Disease (BCD) hypothesis. The findings reveal that higher productivity is positively associated with both implied prices and hourly labor costs across sectors, supporting the wage equalization mechanism central to BCD. However, the relationship between productivity and wages or prices is weaker in labor-intensive sectors like tourism, underscoring their structural vulnerability to wage-driven cost pressures. Additionally, the COVID-19 pandemic significantly increased implied prices but had no statistically significant impact on labor costs, highlighting the differential effects of external shocks on wages versus prices. These results emphasize the challenges faced by low-productivity, labor-intensive sectors in managing cost dynamics, offering insights for policymakers addressing sectoral imbalances in the context of BCD.