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Effects of health and education on labour force participation

Staff working paper

this paper by Patrick Laplagne, Maurice Glover and Anthony Shomos was released on 22 May 2007. The paper explores alternative methodologies to obtain estimates of the labour force participation effects of the health and education variables targeted by the National Reform Agenda. Also see:

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  • Key points
  • Contents

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


Cover, Copyright, Contents, Acknowledgments, Abbreviations and explanations, Glossary, Key points, Overview

1 Introduction
1.1 The National Reform Agenda
1.2 Aim of the paper and analytical approach
1.3 Results and implications for the projected effects of the National Reform Agenda

2 Literature review
2.1 Health and participation
2.2 Education and participation

3 Endogeneity between human capital and participation

4 Data source

5 Results and discussion
5.1 Impact of greater educational attainment on labour force participation
5.2 Impact of improved health on labour force participation
5.3 Goodness of fit of the models
5.4 Evidence of endogeneity due to simultaneity and rationalisation
5.5 Evidence of endogeneity due to unobserved heterogeneity

6 Conclusion
6.1 Impact of endogeneity
6.2 Policy implications
6.3 Future research directions

A Variable construction and descriptive statistics
A.1 Variable construction
A.2 Descriptive statistics

B Direction of endogeneity bias
B.1 Endogeneity bias in the presence of unobserved heterogeneity
B.2 Endogeneity bias in the presence of simultaneity
B.3 Endogeneity bias in the presence of rationalisation endogeneity

C Model estimation results
C.1 Multinomial logit models
C.2 Simultaneous equations model
C.3 Marginal effects estimates