1  Introduction

Health is a key factor in a person's ability to develop their skills and knowledge. The mix of skills, knowledge and capabilities that a person possesses (their human capital) is positively related to their productivity and the demand for their labour. If poor health is a barrier to developing or using skills, then improving health could raise labour force participation and economic output. In addition, if poor health reduces the number of hours worked, or lowers productivity when at work, then further output could be lost. The costs of treating poor health and the value of lost output are measures of the economic cost of ill health. A better understanding of the relationships between health and labour market participation is a first step towards estimating these costs.

Chronic diseases are of particular health interest as they are a major component of ill health and deaths in New Zealand, and could place even greater burdens on the health system over time. Furthermore, the incidence of chronic disease is partly driven by lifestyle-related risk factors such as unhealthy diet and tobacco consumption that can potentially be modified. In 2005, around three-quarters of deaths in New Zealand resulted from chronic diseases, a proportion that has been rising in recent years.^[1] In countries such as New Zealand, that have an ageing population, understanding this relationship becomes even more important as more people reach the lifestage (note: there are different views about how ageing might affect morbidity as longevity rises) at which their health tends to deteriorate and affect their labour market behaviour (Currie and Madrian, 1999). If both prevalence of, and deaths from, chronic disease continue to rise, there may be significant long-term negative economic impacts arising from increased health care costs and lower labour market participation.

This paper assesses the relationship between health and labour market participation for working age adults in New Zealand. Limited data means there has been little research into the effect of health on labour market participation in New Zealand. However, the inclusion of a detailed health module in the third wave of the longitudinal Survey of Family, Income and Expenditure (SoFIE) has allowed such analysis to be undertaken.

Section 2 of this paper summarises other work done in this area, while Section 3 describes the data used in the paper. Section 4 summarises the methods used, Section 5 reviews the results of the relationship between chronic diseases and labour market participation, Section 6 summarises the results of the relationship between self-rated health and labour market participation and Section 7 concludes. Section 8 presents estimates of the potential impact at the population level; based on the individual level results. Full details of the variables used, methods and the model results can be found in the appendices.

The paper is not a review of current health policy or spending; the focus is identifying relationships (if any) between health and labour force participation. Where any relationships are established, the paper does not attempt to assess how changes in current health policies may interact with these relationships. For example, the case for investing more resources in managing particular chronic diseases to improve labour market participation would require evidence on: how far such investments might reduce the incidence and prevalence of that disease; and how that, in turn, might affect labour market behaviour. This paper does not address such evidence.