Context
On January 17, 2025, Dr. Gustavo Leal Cueva, partner of Leal Benavides y Cía., was appointed Treasurer of the Monterrey Ballet, the most prestigious ballet company in Latin America. Its constant growth and international projection make it a reference in dance. It is distinguished by the artistic excellence of its productions, the international diversity of its dancers and a school that trains future generations of great dancers.
One of Leal Cueva's main projects in this work is to promote the professionalization, modernization and institutionalization of its administrative management, strengthening the progress achieved in recent years.
The performing arts sector in the world presents important economic challenges of sustainability by means other than subsidies and donations, but at the same time there is potential to develop a market and industry that allows the development and dissemination of culture, one of the essential elements in the optimal formation of a society.
In this sense, this economic analysis of the current situation of the performing arts and its economic challenges is presented.
1. Introduction
The performing arts play a crucial role in society by fostering cultural expression, cognitive development and general well-being. In addition to their social impact, they represent a significant economic sector that generates employment and contributes to tourism and the cultural identity of countries; however, these industries face structural economic challenges that threaten their long-term sustainability. This report analyzes the current situation of the performing arts from an economic perspective, considering Baumol and Bowen's “cost disease” theory, their evolution in recent studies, the positive impact these activities have on society, and additional economic theories that explain their functioning and challenges. In addition, comparative data on the evolution of wages in the sector and strategies to improve their sustainability are included.
2. The “Cost Disease” in the Performing Arts
In 1965, William J. Baumol and William G. Bowen introduced the theory of “cost disease,” an economic phenomenon that affects sectors with low relative productivity. The theory describes how certain sectors of the economy, particularly service industries, experience wage increases without a corresponding increase in productivity.
In some sectors, such as manufacturing, productivity grows rapidly due to automation and technological improvement; however, in other sectors, such as education, health or the performing arts, productivity grows slowly because they depend on human interaction (e.g., a teacher still needs the same amount of time to teach a class).
The theory states that, unlike sectors where technology improves productivity and reduces unit costs, in activities that rely heavily on human labor, such as musical or theatrical performance, costs increase continuously without commensurate improvements in efficiency. Because of these higher labor costs, services tend to become more expensive over time (e.g., university education or health services have increased significantly in price).
Illustrative example:
A violinist in 1900 played a Beethoven quartet in 45 minutes.
In 2023, a violinist still takes 45 minutes to play the same piece.
But in 2023, that violinist earns much more money than in 1900, because wages in the general economy have gone up.
This phenomenon, where costs in one sector go up without productivity increasing, is known as “Baumol's cost disease”.
Many artists accept working for low wages because they love their profession and derive personal satisfaction from their art (“psychological returns”); however, there is a limit to how much artists can sacrifice before seeking work in other, higher-paying sectors. If salaries in the performing arts do not grow, there will eventually be less talent available, which will affect the quality of performances.
Although costs are rising, it does not mean that these sectors are inefficient or should be downsized. In many cases, they are essential to society and justify public or private spending.
Baumol and Bowen divided the economy into two sectors:
Progressive Sector: one where productivity improves with technology (e.g. manufacturing, technology, telecommunications). In these sectors, unit costs tend to decrease over time due to automation and economies of scale.
Stagnant Sector: Where productivity barely changes because the nature of the work does not allow for reductions in time or personnel (e.g. performing arts, education, healthcare). Here, costs rise because wages must increase to remain competitive, but without an increase in productive efficiency.
Since the performing arts require time and human talent, it is difficult to apply automation processes without affecting the quality of the artistic product. This generates a growing financial gap between revenues and operating costs, forcing many organizations to rely on subsidies and grants to stay in operation.
Although this theory was proposed in 1965, it is still valid today. Subsequent studies, such as that of William Nordhaus (2006), have confirmed that sectors with low relative productivity have rising costs and high prices. Comparisons with the technology industry show that while sectors such as manufacturing have managed to reduce costs through automation, the performing arts have experienced an increase in costs due to the need to maintain highly qualified human talent.
3. Contrast with the recent development of the performing arts
While the “cost disease” theory remains valid for many performing arts sectors, some have demonstrated an ability to adapt and grow in revenue. This partially challenges the notion that the performing arts are inherently destined for continued financial crisis.
Some sectors have been able to increase revenues through diversification of business models and technological innovation:
Live music and festivals: growing demand for live events has generated record revenues from international tours and festivals. Major artists have adopted diversified revenue models through merchandising, digital content and sponsorships.
Musical theater and high-production shows: Franchises such as The Lion King and Hamilton have expanded their global markets with effective monetization strategies, including content licensing and digital streaming.
Multimedia productions: The combination of performing arts with digital technology has enabled the sale of content on streaming platforms and immersive experiences that have expanded global audiences.
Commercial dance and digital entertainment: The integration of dance with audiovisual productions and mass events has driven new revenue models, such as social media and brand sponsorships.
The success of these sectors is due to several key factors:
Technological innovation: implementation of digital tools to reduce costs and improve content distribution.
Revenue diversification: Monetization of digital experiences, merchandising and premium content.
Market globalization: Expansion of shows to international markets with high demand for cultural consumption.
Despite these advances, the “cost disease” continues to affect many traditional performing arts organizations, such as:
Symphony orchestras and opera companies, which are dependent on external funding due to high production costs and limited capacity for expansion.
Independent theaters and classical dance companies, which face difficulties in increasing revenues without compromising artistic quality.
4. Current situation and economic challenges
Today, performing arts organizations operate with unsustainable funding models. The COVID-19 pandemic exacerbated this situation, reducing box office revenues and increasing competition for public and private funds.
The following table shows the evolution of U.S. performing artist revenues from 1960 to 2023, adjusted for inflation
Profesión | Annual Income (USD, 1960) | Adjusted Income to 2023 | Annual Income (USD, 2023) |
Actors | 5,640 | 58,204.80 | 34,083 |
Musicians | 4,757 | 49,092.24 | 62,000 |
Dancers | 3,483 | 35,944.56 | 47,388 |
As can be seen, salaries, although in some cases have increased, continue to be at the lowest income levels in the U.S. It has been suggested that one alternative to solve this problem is to reduce costs.
It has been suggested that one alternative to solve this problem is to reduce costs. In the case of the performing arts, a reduction in costs implies fewer rehearsals, lower quality costumes, simpler scenery, etc., but this reduces the quality of the show, which may reduce audience attendance and affect the reputation of the organization.
The most logical option would seem to be to raise ticket prices to offset rising costs; however, Baumol himself shows that ticket prices have risen less than inflation. Many organizations cannot raise prices much because the public is not willing to pay very expensive tickets. There is a doctrine of “fair pricing” in the arts, which seeks to make shows accessible to the greatest number of people.
5. Industries challenging the "cost disease"
Soccer and other professional sports seem to defy Baumol' s cost disease theory because, although they depend on human interaction and have not fundamentally changed their productivity (a game still lasts 90 minutes and requires the same number of players), revenues have grown exponentially without generating a disproportionate increase in labor costs.
This is because, although soccer's productivity, measured in minutes played, has not changed, its productivity in terms of revenue generated per unit of time has increased.
Globalization, television broadcasting, streaming and sponsorship have allowed a single match to be watched by millions, exponentially increasing revenues without the need to increase costs proportionally.
In sectors such as healthcare and education, demand does not automatically translate into exponential revenues because they are limited by regulations and consumer purchasing power. In contrast, soccer has managed to monetize its appeal massively through broadcasting rights, advertising, sponsorship and merchandising, leading to financial growth without the need to increase “labor productivity” in traditional terms.
In education or healthcare, salaries increase across the board without an equivalent increase in income per professional. In soccer, the difference in income between players is extreme: while some earn millions, others barely receive decent salaries. This shows that the market rewards the differentiation of talent more than the simple need to equalize salaries with other sectors.
Now, this does not necessarily mean that soccer refutes Baumol's theory, but it does show that certain sectors can escape the cost disease if they find ways to scale their revenues without proportionally increasing costs; however, this is not a viable option for sectors such as health or education, where service delivery is less scalable and depends directly on the professional's time.
5. Conclusion
The analysis reveals that while the “cost disease” remains a valid theory for many performing arts sectors, others have managed to mitigate its effects through technological innovation, diversification of revenue models and international expansion. However, the sustainability of the sector in general continues to depend on the capacity for adaptation and external financing, which makes the development of policies and strategies to support culture crucial.
The performing arts sector is not only fundamental to a nation's cultural enrichment, but also has a significant economic impact. Its strengthening requires a combination of innovation, public and private investment, and support policies that guarantee its long-term viability.
Bibliography
Baumol, W. J., & Bowen, W. G. (1965). Performing Arts: The Economic Dilemma. Twentieth Century Fund.
Nordhaus, W. D. (2006). Baumol’s Diseases: A Macroeconomic Perspective. National Bureau of Economic Research.
UNESCO (2021). The Contribution of Cultural and Creative Industries to Economic Growth and Development.
DCMS (2024). Impact of Cultural Participation on Mental Health and Wellbeing.
Organización Internacional del Trabajo (OIT). (2023). Condiciones laborales en la industria cultural.
Jochen Hartwig, Hagen Krämer (2019). The ‘Growth Disease’ at 50 – Baumol after Oulton. Structural Change and Economic Dynamics, Volume 51.
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