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Is Health Care Infected by Baumol’s Cost Disease? Test of a New Model

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Rising health care costs are a policy concern across the OECD and relatively little consensus exists concerning their causes. One explanation that has received revived attention is Baumol’s Cost Disease (BCD). However, developing a theoretically-appropriate test of BCD has been a challenge. In this paper, we construct a two-sector model firmly based on Baumol’s axioms. We then theoretically derive two propositions that can be tested using observable variables. In particular, we predict that: 1) the relative price index of the health care sector, and 2) the share of total labor employed in the health care sector should both be positively related to economy-wide productivity. Using annual data from 27 OECD countries over the years 1995-2013 and from 14 U.S. industry groups over the years 1947-2015, we show that empirical evidence for the existence of BCD in health care is sensitive to model specification and disappears once we address spurious correlation due to contemporaneous trending and other econometric issues.

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  • Akinwande A. Atanda & Andrea K. Menclova & W. Robert Reed, 2016. "Is Health Care Infected by Baumol’s Cost Disease? Test of a New Model," Working Papers in Economics 16/33, University of Canterbury, Department of Economics and Finance.
  • Handle: RePEc:cbt:econwp:16/33
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Sam Watson’s journal round-up for 12th February 2018
      by Sam Watson in The Academic Health Economists' Blog on 2018-02-12 12:00:21

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    1. Akinwande Atanda & W. Robert Reed, 2018. "Erratum To “What Drives Health Care Expenditure?—Baumol’s Model of ‘Unbalanced Growth’ Revisited” [J. Health Econ. 27 (2008) 603–623]," Working Papers in Economics 18/15, University of Canterbury, Department of Economics and Finance.
    2. Atanda, Akinwande & Reed, W. Robert, 2020. "Not Evidence for Baumol's Cost Disease. A replication study of Hartwig (Journal of Health Economics, 2008)," International Journal for Re-Views in Empirical Economics (IREE), ZBW - Leibniz Information Centre for Economics, vol. 4(2020-1), pages 1-10.
    3. Akinwande Atanda & W. Robert Reed, 2019. "Not Evidence for Baumol’s Cost Disease," Working Papers in Economics 19/05, University of Canterbury, Department of Economics and Finance.
    4. Hartwig, Jochen, 2020. "Not Evidence for Baumol’s Cost Disease. A Reply to Atanda and Reed (International Journal for Re-Views in Empirical Economics, 2020)," International Journal for Re-Views in Empirical Economics (IREE), ZBW - Leibniz Information Centre for Economics, vol. 4(2020-3), pages 1-4.

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    More about this item

    Keywords

    Baumol’s Cost Disease; health care industry; panel data;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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