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

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Abstract

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 derive several testable propositions. In particular, the model predicts that: 1) the share of total labor employed in the health care sector and (2) the relative price index of the health and non-health care sectors should both be positively related to economy-wide productivity. The model also predicts that (3) the share of labor in the health sector will be negatively related, and (4) the ratio of prices in the health and non-health sectors unrelated, to the demand for non-health services. Using annual data from 28 OECD countries over the years 1995-2016 and from 14 U.S. industry groups over the years 1947-2015, we find little evidence to support the predictions of BCD once we address spurious correlation due to coincident trending and other econometric issues.

Suggested Citation

  • Akinwande A. Atanda & Andrea K. Menclova & W. Robert Reed, 2017. "Is Health Care Infected by Baumol’s Cost Disease? Test of a New Model," Working Papers in Economics 17/11, University of Canterbury, Department of Economics and Finance.
  • Handle: RePEc:cbt:econwp:17/11
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    File URL: http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/1711.pdf
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    Blog mentions

    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

    More about this item

    Keywords

    Baumol’s Cost Disease; health care industry; panel data;

    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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