The Role of Health in Economic Development

Jocelyn E. Finlay, Harvard University

The role of health in economic development is analyzed via two channels: the direct labor productivity effect and the indirect incentive effect. The labor productivity hypothesis asserts that individuals who are healthier have higher returns to labor input. This is well tested in the empirical literature with mixed conclusions. The incentive effect is borne of the theoretical literature, and individuals who are healthier and have a greater life expectancy will have the incentive to invest in education as the time horizon over which returned can be earned is extended. Education is the driver of economic growth, and thus health plays an indirect role. Accounting for the simultaneous determination of the key variables, growth, education, health, the results show that both the direct and indirect effects of health are significant. This paper shows that without recognition of the indirect role of health the economic benefits of health improvements will be underestimated.