1  Introduction

A healthy workforce is an important economic asset. Poor health can impact on the economy in numerous ways. As well as the obvious impact on health care costs, ill health can impact on labour market behaviour; for example, participation, wages, hours worked, productivity and retirement decisions. It is therefore important from an economic growth perspective to understand the relationships between health and labour market behaviour in order to help inform any policy decisions aimed at improving health. In countries such as New Zealand, which have an ageing population, understanding these relationships becomes even more important as more people reach the age at which their health may deteriorate and affect their labour market behaviour (Currie and Madrian, 1999). New Zealand's labour productivity is the subject of ongoing research and debate. One of the motivations behind this paper and a companion piece on labour force participation (Holt, 2010) was to explore the relationship between health and labour market behaviour and productivity. Underlying this issue is the question of the extent to which productivity is affected by barriers to skills utilisation (such as ill health), as opposed to other factors such as poor skills formation.[1] As an initial step towards answering such questions, this paper summarises the results of a cost of illness type study aimed at estimating some of the costs associated with ill health in New Zealand using evidence from the Survey of Family, Income and Employment (SoFIE). It is acknowledged from the outset that it is not possible to use SoFIE to estimate all costs associated with ill health. As such this study aims to estimate the magnitude of just some of the associated costs.

The main focus of this research is estimating some of the indirect costs; that is, the value of potential resources lost. This includes lost output as a result of: being away from work; being less productive at work; working fewer hours; and being out of the labour force completely owing to ill health. Estimating these indirect cost components is inherently difficult. Even with data on current behaviour, it is difficult to predict how behaviour would change if a certain factor, such as an individual's health state, was different. In addition, while the SoFIE data provides a wealth of information on a person's current behaviour, some information required is not available. As such this inevitably requires a number of assumptions. Where assumptions are made, they are based on reviews of other research in the area. The resulting estimates should be interpreted with these caveats in mind. Throughout the results, the strengths and weakness of the estimates will be highlighted and where weaknesses exist, and other data sources are available, these will be presented to help contextualise the estimates from SoFIE.

The only element of direct costs (which are the cost of resources used) that will be included are hospital inpatient treatments. These are estimated from SoFIE despite it being possible to obtain them from Ministry of Health (MoH) published information. SoFIE is used as it enables hospital inpatient appointments to be attributed to people and thus compared with labour market information. This information feeds into the estimates of the indirect costs, ensuring the cost of appointments and those of lost hours are from the same source.

There are relatively few existing cost of illness studies for New Zealand. The ones that do exist generally adopt a top-down approach rather than a bottom-up approach using person-level data. With the availability of micro-level data on health from SoFIE, there is now an opportunity to estimate the cost of illness using a bottom-up approach. This type of micro-level data has the potential to provide information about the characteristics of individuals with various health states and labour market outcomes in a manner that aggregate data does not allow. The current study provides an initial demonstration of the type of cost of illness analysis that can be done using SoFIE. It is therefore important to bear in mind the study’s limitations, which will be highlighted throughout this paper, when interpreting the results. This is particularly important when interpreting the results from a policy perspective. This paper is not a review of current health spending; the focus is simply to try to obtain first estimates of costs that are lost in one year as a result of ill health. The paper is not a cost-effectiveness or cost-benefit analysis. As such it does not attempt to assess how changes in current health policies may result in better health outcomes and thus cost savings. Overall, although this study may imply that there is potential for better labour market outcomes if health was improved, it remains silent about the scope to realise this potential, or the possible policy mechanisms to achieve it.

Section 2 provides the theory behind the costs associated with ill health. It then summarises the results of other work done in this area before defining the costs of ill health that can be estimated using SoFIE and those that cannot. Section 3 of this paper describes the data used. The methods and results for direct costs are summarised in Section 4. For each component of indirect costs in turn, Section 5 summarises the method used and then presents the estimates using the defined method. Section 6 brings all the cost estimates together and provides a discussion. Full details of the variables used and the model results can be found in the appendices.