The Relationship Between Expenditure and Labor Productivity

Abstract

Theoretically, the relationship between health expenditures and labour productivity is ambiguous. On the one hand, health expenditures can enhance labour productivity by improving health of workers. Poor health impairs both the working hours and productivities of workers. When workers are healthy, they become physically and mentally more energetic and they have higher incentive to develop new skills and knowledge. On the other hand, increase in health expenditures may deteriorates labour productivity by crowding out physical capital investment. Causality between health expenditures and labour productivity is also ambiguous. This paper investigates the long-run relationship between health expenditures and labor productivity by utilizing a panel data covering the period between 2000 and 2015 and 35 OECD countries. Results of the study displays that there is a positive and statistically significant long-run association between health expenditures and labor productivity. Findings indicate that an increase in per capita health expenditure leads to a rise in labor productivity in terms of GDP per person employed. Results of the study also suggest that there is a mutual (bi-directional) causality relationship between health expenditures and labor productivity indicators.