Problem:
Many economists believe that the growth of productivity (output per hour) is much slower for services than for goods. This is easy to see in the case of T-shirts versus haircuts. Over the past 50 years, the number of T-shirts a worker can produce in an hour has increased dramatically due to technological advances in cotton-picking, weaving, and assembly-line production techniques. Over the same period, however, the number of haircuts a barber could perform in an hour has probably increased very little, if at all. The cost of services like haircuts, medical care and education tend to rise over time. Discuss why these items keep getting more and more expensive, both absolutely (they cost more dollars) and relatively (they require a larger and larger portion of our incomes) and why productivity is slower for services than goods?