ECON 440 Lecture 1: Why Health Productivity and Human Capital
13 Jun 2018
School
Department
Course
Professor
Each individual/organization is trying to optimize their well-being, given the constraints they face
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Rather on how actors behave, make decisions, and interact with each other, and the factors that
determine/influence these
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Focus isn't explicitly on profits
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Health economics is the study of the behavior and interactions of individuals and organizations
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Waiting times
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Difference in access to healthcare/resources
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Provincial systems: each is different
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Regional disparities: urban vs. rural areas
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Gaps in coverage
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Safety/quality
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Major Healthcare Issues in Canada
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Cost of insurance, Rx pricing, healthcare services, etc.
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Overprescribing medicine
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Labor market - ESI
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Safety/quality
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Major Healthcare Issues in the US
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Health Economics
Constitution of the WHO
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"Health is a state of complete physical, mental, and social well-being and not merely the absence of disease or
infirmity"
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Person asked how you would rate your health on a 5-point scale
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Cheap to collect information
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Predictive of morbidity/mortality
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Own subjective knowledge of well-being
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Individual's self-rated health status
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e.g. can you walk alone?
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Mobility and physical activity
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Physical symptoms and problems
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Practically, we often measure it as:
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e.g. physical activity, diet, etc.
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And, as capability declines, the healthcare system demands more from individuals
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Movement from prevention to treatment as we age
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There are parallels between maintaining health in age groups
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What is Health?
What do you do?
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What do your parents do?
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What do your grandparents do?
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What do we do to Stay Health or Improve our Health?
Consumption
a.
Investment in productivity
b.
Why do individuals demand health?
1.
Changes over time
a.
Differences by age, income, education, etc.
b.
How do individuals decide how much to invest in health/produce?
2.
The Grossman Health Capital Model
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Outline
Lecture 1 - Why Health?: Productivity and Human Capital
Tuesday, January 23, 2018
4:58 PM
ECON 440 Page 1
Differences by age, income, education, etc.
b.
Health is one element that yields utility, among others
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time and income available
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Productivity (health and other goods)
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Individuals maximize utility by choosing the amount of health and other consumption, subject to constraints:
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Demanded as a consumption good, and as an investment in productivity
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Health is both demanded and produced by individuals
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Health is a durable capital stock that yields an output of healthy time
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The initial stock is influenced by genetics, HC system at birth, prenatal environment, health of parents,
socioeconomic status, premature birth, etc.
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The rate of depreciation increases with age
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Individuals inherit an initial amount of this stock that depreciates with age, and can be increased by investment
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Raise productivity in the market sector ($)
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Raise productivity in the nonmarket or household sector (utility)
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Human Capital Theory: increases in a person's stock of knowledge or human capital will:
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Benefits: improved productivity
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Costs: direct outlays on market goods and the opportunity cost of time
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Investments in human capital (formal schooling, on-the-job training)
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Health gives you more of the ultimate scare resource
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A person's stock of knowledge affects his market and nonmarket productivity, while his stock of health
also determines the total amount of time he can spend producing money earnings and utility (leisure)
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Grossman's contribution: health capital is different
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Grossman's Model of Health Capital (1972)
This changes over time
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Differs by age, income, etc.
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Individuals decide on the amount of health to invest in/produce in each period
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The Nature of Investment
Subject to time and income constraints
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Money itself doesn't give incremental utility, but buying goods does
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There are things that increase utility but decrease health
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People aren't health maximizers
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Health yields utility: individuals choose their health amount + other goods to maximize utility
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And of Consumption!
It feels good to be healthy
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Direct utility value
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Leisure is more fun if you're healthy
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Labor vs. leisure = production vs. consumption
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1a: Health as a Consumption Good
These components of human capital cannot be separated from an individual once she has acquired them
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Abilities or attributes that increase a person's productivity
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Examples:
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What is Human Capital?
e.g. 365 - H - S = L + W
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Total time = leisure + work + producing health + being sick
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If an increase in time spent producing health reduces the time spent being sick, there's a potential for net gain
in time available for work and leisure
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1b: Investments in Health Can Increase Time for Labor and Leisure
Health capital can also increase productivity, meaning increased utility/wage for the same amount of time
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Can increase income/utility via more time
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Or via increased productivity
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So, aside from consumption value of health, the desire to spend time improving health comes from its use as
an investment good
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1b: Health Can Also Increase Productivity
2: Health Production
ECON 440 Page 2
Own time, skills, and effort
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Other market goods - derived demand for health care
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Constraints: diminishing marginal returns
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What do we use to produce health?
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Prices of health care
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Wage rates
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Assumed to increase with education
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Individual productivity in producing health
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What determines how many resources to allocate to producing health?
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2: Health Production
Health endowment
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Health inputs (diet, exercise, smoking, medical care)
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Health is a function of:
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Ability
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Health
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Others' health?
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Productivity is a function of:
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Relationship Between Health and Productivity
Because health is an input in producing other goods (work and leisure), the production possibilities curve looks
different
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Health and Production
A rational actor weighs the costs and benefits of investments in health
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Grossman model highlights how the optimal level of health chosen may vary with age, income, and
education, given how the costs of health inputs vary with these factors
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She allocates resources accordingly to maintain her health stock over time
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She chooses an optimal life span, allowing her health stock to diminish at some point to
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Grossman's Model: Optimal Health Stock and Investments in Health
Why does the MB curve slope downward?
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Optimal health stock
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Optimal Health Stock
Health stock depreciates (deteriorates) faster with age - cost increases so optimal health stock decreases
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Pure investment model predicts that optimal health capital decreases with age
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See textbook for discussion of roles of education and income
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2a: Grossman's Model: Optimal Health Stock and Investments in Health
If optimal health stock is lower, why do the elderly consume more health care services than they did in their
youth?
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Does optimal amount still decrease with age?
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What happens to optimal health capital if we allow for consumption value of health in addition to investment
value?
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Pure investment model?
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Investment and consumption?
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What happens to optimal health capital when a worker retires?
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Answer and Explain
If you observe two different populations with different levels of health, what do you think is likely going on?
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Do they have differential constraints on access to health inputs?
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Or, differential productivity in producing health?
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Or even differential demand for health relative to other things that brings utility?
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The Grossman model suggest the following questions:
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Grossman Applied
Demand: consumption and productivity
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Production: factors that affect marginal cost and benefits of investments in health
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Health is both demanded and produced by individuals
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Health is a capital stock
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Key Points
ECON 440 Page 3
