• Stewart Turner, Andrew Barker, Matthew Forbes
• Productivity Commission

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Image: Thomas Hawk / flickr

24 March 2010Human capital theory supports the view that people with higher levels of education and lower incidences of chronic illness should have higher labour productivity. This paper examines the Australian evidence.

Hourly wages can be used as an indicator of labour productivity. While wages are likely to be a reasonable indicator of the effects of education on labour productivity, statistical issues and the way that labour markets function in practice mean that using wages as an indicator could lead to results that under- or overstate the negative effects of ill health on labour productivity.

In this paper, higher levels of education are estimated to be associated with significantly higher wages. Compared to a person with a year 11 education or less, on average:

• a man with a year 12 education earns around 13 per cent more, and a woman earns around 10 per cent more
• a man with a diploma or certificate earns around 14 per cent more, and a woman earns around 11 per cent more
•a university education adds around 40 per cent to men's and women's earnings.

People in the workforce who suffer from chronic illnesses are estimated to earn slightly less than their healthy counterparts (between 1.0 per cent and 5.4 per cent less for a range of conditions).It is possible that these results understate the impact of ill health on productivity, because of the impact that one person's illness can have on other employees. It is also possible that 'endogeneity bias' and unobserved heterogeneity in the data lead to results that overstate the positive effects of education and good health on labour productivity.

A second objective of this paper is to estimate the potential productivity of people who are not employed or not in the labour force. These people tend to have characteristics that are systematically different to people who are employed. For example, they tend to have less education and work experience, and also to be in worse health. Because of this, they are more likely to be targeted by government programs.

Comparison of the characteristics of people in employment with those not in employment found that, depending on their age, gender and whether they receive the Disability Support Pension, the average potential wage of people who are not employed or not in the labour force is between 65 and 75 per cent of the wage of people who are employed.

Image: Thomas Hawk / flickr