Validity of the Baumol Cost Illness hypothesis in the healthcare industry

Health is an important indicator of living standards in a country. With the provision of appropriate health services, a country's population can enjoy better health. Thus, the human capital of the nation can be strengthened and accordingly, the country's productivity can increase and contribute to economic growth. This importance of health services has led to an increase in the need for health expenditures. As a matter of fact, the share of health expenditures in GDP is increasing in most OECD countries. The increase in health expenditures has brought with it the debates on productivity and the macroeconomic effects of health expenditures. These discussions mainly focus on the Baumol effect, which is based on Baumol's unbalanced growth model and the reflection of this effect on the health sector. In this context, one of the possible reasons for the increase in health expenditures is the slower growth of labor productivity in health services than in the general economy. In this study, the Baumol effect on health expenditures was tried to be estimated using a panel data set based on the years 2000-2018 of 36 OECD countries. In the study, empirical evidence has been reached that the Baumol effect is valid for the countries in the sample.