Cheap, Excellent Restaurants in 1990s Prague?

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The Baumol Effect in post-Communist Prague

When Clare and I visited Prague in the 1990s, shortly after the fall of Communism, the city seemed impossibly charming. The old town glowed with baroque façades and candlelit restaurants, where we ate elaborate and beautifully-prepared meals which were absurdly, almost embarrassingly, cheap compared to what we would have paid back in the UK. 

Economists, it turns out, have a name for this tourist experience. William Baumol called it the cost disease — the tendency for prices in low-productivity parts of the economy to rise in step with wages across the whole economy, driven by the high-productivity sectors. 

In Britain, the long twentieth century of industrialisation had left wages high, even in humble trades, because the country’s great productive engines — manufacturing, finance, engineering — had dragged the national pay scale upward. On average, waiters' wages had to keep pace with technicians' - or too many would vanish to the better-paid jobs.

Prague, by contrast, was emerging from socialism: its capital stock and technology were still years behind. The waiters, the musicians, the chefs had world-class skills but all earned local wages anchored to modest Czech productivity. Their artistry cost little in pounds sterling because purchasing power parity had not yet caught up.

In competitive labour markets, firms bid for workers. Employers in high-productivity sectors can afford to pay more because each worker’s output, magnified by their expertise and amplified by the power of machines, generates greater value.

To hold their staff, firms in slower sectors must match the going rate. Thus wages converge across the economy, even where productivity does not. When Britain’s advanced industries lifted average wage costs, restaurant meal and haircut prices rose too.

Prague’s had not yet done so; our meals and accommodation were, temporarily, a bargain.

Within a decade the balance began to shift. Capital investment kicked in, productivity increased, wages in the Czech Republic rose, tourism surged, and the hidden subsidy of underpaid service labour faded. The same dinner now costs what it does in London or Paris. 

Still, I remember those evenings by the Vltava with a certain nostalgia: the music drifting from the embankment cafés, Clare laughing over a glass of Moravian wine, the quiet astonishment that something so lovely could be so affordable in a setting so beautiful. 

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