Rate of Return to Education and Wage Rate in Health Care: An International Comparison

Presenter: Bianca Frogner, John Hopkins School of Public Health

Abstract

Rationale: Discussion of technology in the form of human capital is absent from the health care literature. Human capital is a large component of health care spending given that health care is a service industry reliant on labor as the final product and wage rate being the cost of labor. Wage rate is a measure of the cost of labor and is also a measure of the embodiment in workers the influence of technology in the form of new technology and skills, or human capital.

Objective: This study develops a framework to compare the investment level in human capital across industrialized countries and models the growth of health care wage rate.

Study Population and Data: Education and wage rate data from 1970 to 2005 for six OECD countries are used to determine rate of return to education within a country. The data are also modeled to gain insight into the behavior of health care wage rate growth relative to the average wage rate.

Modeling Approach: The Mincer model which estimates wage rate as an exponential function of years of schooling and the rate of return to a year of schooling. The model can be used to calculate the rate of return to education which is constant across industries. All levels of education through specialist training for medical students, which is important in determine an accurate rate of return to education. The differences in wage rate levels are determined by differences in the average years of schooling between industries. With information about the rate of return to schooling and average years of schooling, the wage rate can be estimated for health care relative to other industries.

Results: Controlling for inflation and using national currency units, the average wage rate of a health care employee has been growing smoothly and approximately parallel to the GDP per capita filtered out for economic shocks, or "potential GDP" per capita. Health care wage rate growth can be estimated as a function of potential GDP with levels determined by the Mincer model using calculated rate of return to education and average years of schooling and assuming a constant multiplier for tax and fringe benefits.