Testing Baumol’s Cost Disease in Tourism: Productivity, Prices, and Labor Costs in Selected EU Countries Amid COVID-19 and the Russo–Ukrainian War

This paper investigates the impact of the transition from manufacturing to tourism on sectoral productivity, output prices, 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 analysis captures the impact of major external shocks, including the COVID-19 pandemic and the Russo–Ukrainian war, treated as jointly sourced super-shocks. The regression results indicate significant price disruptions following these shocks, whereas no statistically significant trend in labor costs was detected in the post-treatment period. These results highlight the differential effects of external shocks on wages versus prices, emphasizing the challenges faced by low-productivity, labor-intensive sectors in managing cost dynamics. The findings provide valuable insights for policymakers addressing sectoral imbalances in the context of BCD and navigating the economic consequences of global disruptions.