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Has health capital formation cured ‘Baumol’s Disease’? – Panel Granger causality evidence for OECD countries

A large body of both theoretical and empirical literature has affirmed a positive impact of human capital accumulation in the form of health on economic growth. Yet Baumol (1967) has presented a model in which imbalances in productivity growth between a ‘progressive’ (manufacturing) sector and a ‘nonprogressive’ sector of the economy (of which health care forms an integral part) lead to perpetual expenditure shifts into the latter and, as a consequence, to a decline in overall GDP growth. Which of the two views has an empirical grounding is here tested by means of Granger causality analysis of a panel of 21 OECD countries. The results do not lend support to the hypothesis that health capital formation fosters economic growth in rich countries. They are more in line with the predictions of Baumol’s model of unbalanced growth.

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Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 08-206.

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Length: 33 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:kof:wpskof:08-206
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