Human Capital Theory and Health

Now we have reviewed the basic idea of human capital theory. There are uncounted numbers of extensions and modifications. For my purpose the basics are enough. What has not been said is how health fits into this model. So far only human capital has been mentioned. Fortunately, Gary Becker himself developed a model which incorporates the effort a person spends on his work as one additional determinant of wages. Effort will be the important link between an individual’s health and her labor market rewards. How this is accomplished will be shown in this section. In the end, we will have a model which predicts the effect of health on labor market rewards. The model also states the basic conditions under which health selection is to be expected. It is also the starting point to look for gender differences in health effects on the labor market.

Becker (1994) sees health as a human capital investment. It can increase productivity in the same way as training or education can (Becker 1994, Mushkin 1962). The analogy between health and education with regard to productivity has been termed health capital theory (Stern 1983, 42). Health capital increases the time a person can spend working and earning wages and commodities (Grossman 1972).

2Though not necessarily the same accumulated wages. They will differ if costs other than lost time to work are needed to gain more human capital. Tuition fees should make such a difference. Paying a student loan will need higher overall wages to compensate the investment, but will lead to the same total net income over the life course.

One of the most well-known phenomena connecting health selection and labor market processes is the so called worker-effect (McMichael, Spirtas & Kupper 1974). The healthy-worker-effect hypothesis states that in order to participate in the working force an individual has to have a minimum level of good health. Those who do not reach this level cannot participate in the labor force. The sick therefore become, stay, or already are unemployed or not-employed. On aggregate this leads to the empirical observation that those in the labor force are more healthy than those who are not part of the labor force. The magnitude of the healthy-worker-effect can vary among different sub-populations of the working force (Li &

Sung 1999). There is also some evidence for health selection between occupations. Those who are worse off with their health choose other jobs which are less endangering to their health (Li

& Sung 1999, Ostlin 1988).

After these introductory examples, I will now go into detail about how health affects a person’s productivity, performance, and labor market rewards.

Health constitutes an important resource for a person. Effort spend on the job costs energy and creates the need for recovery. Several studies show that there is an inverse relationship between health, exhaustion and need for recovery (Sluiter, van der Beek & Frings-Dresen 1999, Sluiter, Frings-Dresen, van der Beek & Meijman 2001, Sluiter 2003). Other studies show a strong association between subjective health and sickness absence (Ferrie, Kivim¨aki, Head, Shipley, Vahtera & Marmot 2005, Eriksson, von Celsing, Wahlstr¨om, Janson, Zander & Wallman 2008, Roelen, Koopmans & Groothoff 2010).

I will argue that the state of health of workers is an important factor for their labor market outcomes. Later, I will develop the theory further allowing for differences in the health effect between men and women.

Most theories deal with wage effects of certain health characteristics of workers. I will just refer to rewards in general, because my empirical analyses refer to job positions. It is also the most general assumption that fulfilling certain tasks within a job are rewarded by certain benefits, whatever their nature (Sørensen 1983, 205). It is thereby a more general approach and allows for an easier adaption to different labor market contexts.

Human capital theory argues that labor market rewards increase with work hours, human capital, and the effort spent per hour of work (Becker 1985, S44).

The effort persons can spend during their hours at work is limited, because their overall time budget is limited (Galama & van Kippersluis 2010, 10). The effort at work depends on the overall amount of energy available, the effort needed for other activities outside the labor market, and the ability to regenerate energy. All three factors can be directly or indirectly influenced by a person’s health status.

The overall amount of energy depends on a person’s physical and mental resources to deal with problems. If a person is taken ill, or has a long-standing physical impairment, a part of the energy a person has is spent on fighting the illness, coping with the impairment, and recovery

in general. This leaves less energy for all other activities, including paid work.

Illnesses and health impairments often demand a lot of time and attention by the stricken person. Doctor visits, hospital stays, therapy sessions or longer time needed for day-to-day activities are just some examples of how impaired health may lead to increased off-labor-market efforts that are (in)directly related to health problems.

Sleep, leisure time, and relaxation are important for recovering energy spend on different activities on and off the labor market. If a person does not have enough time or support to recover the energy needed, the person either has to spend overall less energy or has to “borrow”

energy (Becker 1977, 30).

Energy can be borrowed from time to come, so that one has to deal with reduced energy in the future. This may be both in the close, e.g. fatigue at weekend (Demerouti, Blanc, Bakker, Schaufeli & Hox 2009), or in the distant future, e.g. burnout, or chronic health problems (Paringer 1983). For example, within the German context Schnitzlein (2011) finds that taking less holidays impairs subsequent subjective health. For another empirical study see e.g. de Croon, Sluiter & Frings-Dresen (2003).

If a period of illness occurs, persons therefore have to decide whether to use energy now at the expense of less energy in the future or to reduce effort at work now. Both options carry a risk. The problem is that usually not enough information exists to make a completely informed decision. Due to this lack of information I argue that persons rely on what they know or think about work, recovery, and health. This knowledge is usually based on experiences at work, on how absenteeism is received there, and on knowledge about regaining strength, long-term fatigue, illnesses, etc. The decision will therefore be influenced by health related behavior and values learned and adopted through socialization in childhood, school, and at work. It is thus feasible to expect that the possibility of borrowing energy is used to different extents by men and women. Why this is the case and why this might be important for the relationship between health and LMR is a separate question which I will address in section 2.6.1.

I add a second way of borrowing energy. Energy can also be borrowed from other persons in which case they have to take over part of the work a person has to do. In case of illnesses or reduced overall health the demand for recovery is usually greater than in times of good health.

In fact, increased sickness absence is one way to deal with a high demand for recovery. Another way would be to externalize non-labor-market-activities to other persons. A partner could take over housework, childcare, or other chores which would allow for more time to recover. In this way one would indirectly borrow energy from one’s partner.

The effect of less effort can be seen in either a reduction of work hours or a reduction of effort per hour. Especially the second option is often the case if health impairments are not too severe or if economic constraints do not allow a reduction of work hours (through sick days).

Sometimes this reduction might be even unwittingly if rather latent factors like mental health problems, lack of sleep or related phenomena are the cause of the health situation. In any case

the worker will get less work done in the same amount of time or the quality of the work is reduced. Overall productivity can therefore be severely reduced even if work hours are not reduced. This should lead to a reduction in labor market rewards, especially if the health state is impaired for a longer period of time (for a similar argumentation, see Grossman 1976)³. This is the basic model of health, effort, and labor market rewards. Becker (1985, S44) provides a formalization of his general model that allows to link effort to income. The general is equation is:

I =αe^σt,0< σ <1 (2.1) I stands for income, α represents human capital of the individual, e is effort per hour, t are the hours of work on the labor market, and σ stands for the effort intensity of the job. The effort intensity modifies the relation between income and effort. This means that the return to effort depends on how effort intensive a job is. This interesting proposition is discussed in detail in section 2.4.3. For my purposes the model can be generalized to consider all forms of labor market rewards instead of income. In addition, I will develop the hypothesis that the effort-per-hour a person can show at work is a function of his health (H) and the non-labor-market effort (EN LM) required of him. Therefore we can make a small modification to end up with this equation:

LM R=αe(H, E_{N LM})^σt (2.2)

I will pick up this formalization later in the theory building (section 2.4.3 and 2.6.2) as a way to systematize the propositions. It will also be picked up in the methods section to show how the different aspects of the theory are measured and influence the regression equation (see 4.9.2).

At this point, we can explain why health inequalities due to health selection should appear on the labor market. Human capital theory states that healthier individuals are more productive and therefore receive higher rewards or better positions, which in turn results in labor market related health inequalities. The simplicity of the theory is a great advantage. However, so far the theory is gender-neutral. It makes no distinctions between men and women. But is this a reasonable simplification of reality? In the next section, I will argue that it is indeed too simplifying for the research purpose at hand. I will first draw on theories of social inequalities and gender in general, which will raise concerns about the neglect of gender in human capital

3Of course, this argument can also be turned around. Workers earn more per hour, because they are healthier and can spent more effort on work (Becker 1985, Galama & van Kippersluis 2010).

theory. I will then go into more detail explaining how gender matters for health selection and how the theory of health selection must be altered to be plausible.