Using a unique panel dataset this paper explores the labor outcome effects of health changes following a social experiment to increase government health care prices in randomly chosen districts in Indonesia. The effects of health on labor productivity and labor supply have historically played a prominent role in the economic development literature. However, little is still known about the impacts of health policy on labor outcomes. Previous empirical work in this area has been dominated by issues of measurement and endogeneity.
Health is difficult to measure, and is itself influenced by labor supply and productivity.
Furthermore, unobserved heterogeneity is likely to be a component of observed correlations between health, health inputs, health prices, and labor outcomes. The regions for the price increase experiment were randomly chosen, and in addition, households in similar control regions without price changes were included in the panel survey, allowing for precise identification of the price effects. The paper traces the price effects first on the demand for health and health care, as intermediate inputs into labor productivity and labor supply. Both reduced form and structural models are then estimated of the effects on labor outcomes. These effects are allowed to vary across both gender and the life-cycle, and depend on household resources such as wealth and educational capital, to better understand the potentially subtle mechanisms through which health policy affects labor outcomes.