Improving Welfare: The Value of Health
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presence of significant waste. As noted at the outset, it is important to acknowledge the value of health if we are going to make progress with the fundamental policy issues confronting the sector.
Health Can Affect Productivity and Growth, but There Is Only a Modest Link How much does better health matter for economic performance? Intuitively, we know that being in a state of poor health will have an impact on our productive potential, whether we are working in an office or in a field. But the size of the impact, and how much it matters in aggregate, is less clear. With a shrinking labor force due to aging, many ECA countries are looking for ways to encourage work at older ages. Self-assessed health among the 50- to 65-year-old cohort is lower in ECA than in Western Europe. With this factor in mind, we shift our attention to the indirect link between health improvements and overall welfare through its effect on income and growth. That link may be referred to as the “investment value of health,� as opposed to the consumption value, as discussed earlier. In theory, improved health can affect income through various mechanisms. Better health in childhood has been shown to improve physiological and cognitive development, which can lead to better educational outcomes, greater human capital accumulation, and higher productivity and income later in life (Grossman 1972). Health can affect income of adults in several ways. First, labor productivity may improve if healthier individuals are more physically and mentally productive or more effective at using technology or resources (Currie and Madrian 1999). Second, healthy adults may be less likely to miss work due to illness, thereby increasing their earnings. Finally, healthier adults may invest more in their own and their children’s human capital because they expect to enjoy longer, healthier lives. Greater human capital accumulation through higher investments can then result in higher income (Grossman 2000). Unfortunately, several factors complicate research on the relationship between health and income, including measurement issues, reverse causality, and unobservable factors. Neither mortality-based indicators nor subjective self-assessments of health status may adequately capture the link between health and productivity (Schultz 2005). The two-way relationship between health and income also complicates empirical research, because studies that find correlations between health and income often cannot determine whether higherincome individuals invest more in their health or whether healthier individuals are able to earn higher incomes. Furthermore, there may
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