Effects of health and education on labour force participation

This paper provides new estimates of the effects, on the probability of participation in the labour force, of changes in the prevalence of health conditions or changes in educational attainment levels.

The research confirms that better health and education can result in substantially greater labour force participation for those affected:

• Of the six health conditions identified, a mental health or nervous condition, when averted, has the largest positive impact on labour force participation.
• Having a degree or higher qualification has the largest impact on labour force participation, relative to not completing Year 12.

Measurement of these effects is complicated by possible endogeneity bias due to:

• unobserved characteristics of individuals - for example, motivation, innate ability or preferences - which may influence health and education as well as the decision to engage in paid work; and
• the simultaneous determination of health and labour force participation.

Results suggest that:

• unobserved characteristics affect decisions to participate in the labour force; and
• health and labour force participation influence each other simultaneously.

This paper forms part of a Productivity Commission research program investigating in more detail parameters used in its report Potential Benefits of the National Reform Agenda.

The new parameter estimates:

• would alter some of the labour market projections contained in the report, but would not affect the thrust of the conclusions; and
• provide an improved basis for cost-benefit analyses of possible changes in specific health or education policies.

Background Information

Patrick Laplagne (Assistant Commissioner) 03 9653 2167