Unbiased Analysis of Today's Healthcare Issues

Live long or prosper

Written By: Jason Shafrin - Sep• 25•06

A common assumption is that longer life expectancy leads to economic growth. If longevity is a proxy for health and we expect healthier workers to be more productive, longevity should lead to more economic productivity. Further, if individuals live longer, they will have a longer payback period for their investments in human capital (i.e.: education). As human capital increases, productivity and growth should also increase.

An NBER working paper from earlier this summer, however, calls these conclusions into question. Daron Acemoglu and Simon Johnson (2006) find that increased longevity leads to mild or stagnant GDP growth. They also find that GDP per capita decreases or remains stagnant when longevity increases.

The regression methodology is a cross-country panel regression. The authors use a ‘predicted mortality’ measure as an instrument for longevity. The predicted mortality instrument measures whether a variety of health initiatives (eg: the introduction of penicillin and streptomycin, the widespread use of DDT, the eradication of cholera, etc.) were in place at each country over time. The authors show that the instrument is highly relevant, and since these advances were introduced internationally they may be uncorrelated with the error term.

One hypothesis of mine was that longevity’s impact on GDP may not be felt for years since it will be mostly the younger generation who will increase investment in education and these payoffs will not accrue until the future. Acemoglu and Johnson, however, show that increasing longevity did not increase school attendance. This could be due to a bottleneck in many countries’ education systems.

While my faith in cross country regressions is always small, the authors do a good job of performing a variety of robustness checks, and their thesis–while difficult to believe–is also tough to refute. For another review of the paper, check out Greg Mankiw’s blog.

Acemoglu, Daron; Johnson, Simon (2006) “Disease and Development: The effect of life expectancy on economic growth” NBER working paper #12269.

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