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The Cost of Ill Health WP 10/04

2  Background

This section briefly outlines the theory behind the various costs that may result from ill health before summarising the results of other work done in this area. As discussed above, there are limitations to the analysis that can be done with SoFIE and therefore the aim of this analysis is to use evidence from SoFIE to estimate the magnitude of some of the component costs of ill health. This section therefore then goes on to define the specific costs associated with ill health that will be included in this analysis and gives some examples of the additional costs associated with ill health that are excluded (although this list is not exhaustive).

2.1  Theory

As well as the obvious contribution to health care costs, ill health can also impact on labour market behaviour; for example, participation, wages, hours worked, productivity and retirement decisions. An understanding of the relationship between ill health and labour market behaviour is important for informing policy decisions aimed at improving health and labour market outcomes. There is a vast range of interacting effects between economic status and health. There is some evidence that labour force participation and health are simultaneously determined (Cai and Kalb, 2006). That is, health may affect participation but that participation may also impact on health. For some groups participation was found to be positively related to health, while for others participation was found to have a negative effect. It is acknowledged that this reverse causation, working through various economic measures, exists, however, the implicit assumption in this study is that ill health leads to adverse economic outcomes. Any impacts of participating on health are not accounted for.

Health is one of the key factors that may affect 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 the development or use of skills, in youth or adulthood, then improving health will not only lead to a reduction in health care costs, but also result in higher labour force participation and economic output. As people age this relationship becomes even more important. Older people in better health are more likely to maintain their attachment to the labour market than those of poorer health (ie, be less likely to take early retirement or be less likely to reduce the amount of hours worked), again resulting in higher economic output.[2]

Improvements in health are not only likely to increase labour force participation (Holt, 2010; Enright and Scobie, 2010) they are also likely to change the behaviour of those already participating. The number of hours a person is contracted to work in a given period is likely to be impacted by their health. Further, those who participate who have poor health are likely to take more days off work ill (absenteeism) or, if they attend work when unwell, may work less productively (presenteeism). Improvements in health may therefore result in people working more hours than they currently do; being more productive when at work; and taking less days off work for medical appointments or owing to ill health. All this will lead to higher output.

Figure 1 summarises the ways in which improved health is thought to contribute to GDP growth. This lost output, coupled with the costs of treating ill health, may be seen as representing some of the costs resulting from ill health. Any lost output will potentially affect GDP levels and growth. In this paper the lost output is quantified and compared with the actual level of GDP in the period. This quantification assumes that lost output affects not only the individual, but also the GDP output in the economy.

Figure 1 – Productivity and economic implications of improved population health
Figure 1 - Productivity and economic implications of improved population health.
Source:  Buchanan, Blick and Isaac (forthcoming)

Note: Increased labour productivity is for all adults (including those who would have had poorer health and their dependants). It includes increased productivity as a result of less time off work (absenteeism); working more; and working more efficiently (ie, owing to less pain or distractions).

Notes

  • [2]In a study on the role of ill health in retirement decisions, Disney et al (2003) found evidence that health shocks were associated with an increased chance of leaving the labour market.
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