NBER WORKING PAPER SERIES

ADJUSTING NATIONAL ACCOUNTING FOR HEALTH:IS THE BUSINESS CYCLE COUNTERCYCLICAL?

Mark L. EganCasey B. MulliganTomas J. Philipson

Working Paper 19058http://www.nber.org/papers/w19058

NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue

Cambridge, MA 02138May 2013

Previously circulated as "Adjusting Measures of Economic Output for Health: Is the Business CycleCountercyclical?." We thank Ralph S.J. Koijen and William H.J. Hubbard for their valuable input.Tomas Philipson acknowledges financial support from the George Stigler Center for the Study of TheEconomy and The State, The University of Chicago. The views expressed herein are those of the authorsand do not necessarily reflect the views of the National Bureau of Economic Research.

NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies officialNBER publications.

© 2013 by Mark L. Egan, Casey B. Mulligan, and Tomas J. Philipson. All rights reserved. Short sectionsof text, not to exceed two paragraphs, may be quoted without explicit permission provided that fullcredit, including © notice, is given to the source.

Adjusting National Accounting for Health: Is the Business Cycle Countercyclical?Mark L. Egan, Casey B. Mulligan, and Tomas J. PhilipsonNBER Working Paper No. 19058May 2013, Revised January 2014JEL No. E01,I1

ABSTRACT

Many national accounts of economic output and prosperity, such as gross domestic product (GDP) ornet domestic product (NDP), offer an incomplete picture by ignoring, for example, the value of leisure,home production, and the value of health. Previous discussed shortcomings of such accounts havefocused on how unobserved dimensions affect GDP levels but not their cyclicality, which affects themeasurement of the business cycle. This paper proposes a new methodology to measure economicfluctuations that incorporates monetized changes in health of the population in the United States andglobally during the past 50 years. In particular, we incorporate in GDP the dollar value of mortality,treating it as depreciation in human capital analogous to how net domestic product (NDP) treatsdepreciation of physical capital. Because mortality tends to be pro�cyclical, we find that adjustingfor mortality reduces the measured deviations of GDP from trend during the past 50 years by about30% both in the United States and internationally.

Mark L. EganUniversity of ChicagoDepartment of Economics1126 East 59th StreetChicago, IL 60637egan@uchicago.edu

Casey B. MulliganUniversity of ChicagoDepartment of Economics1126 East 59th StreetChicago, IL 60637and NBERc-mulligan@uchicago.edu

Tomas J. PhilipsonIrving B. Harris Graduate Schoolof Public Policy StudiesUniversity of Chicago1155 E. 60th StreetChicago, IL 60637and NBERt-philipson@uchicago.edu

2  

1. Introduction

Ithaslongbeenrecognizedthatgrossdomesticproduct(GDP)isanincomplete

measureofeconomicoutput.Amongotherthings,GDPexcludesthevalueofleisure,home

production,andhealth.YetGDPandnetdomesticproduct(NDP)prevailasmeasuresof

economicoutput.Thisisinpartforapragmaticreason;alternativeapproachescannotbe

adoptedinasimpleandtransparentmanneracrosstimeandcountries.Themeasureofan

economy’swell‐beinghasenormousimplicationsnotonlyforattemptstounderstand

fluctuations,butalsoforitsimpactonnationalpoliciesthataregroundedinthebeliefthat

currentlymeasuredrecessionsarewelfarereducingandboomsarewelfareenhancing.

Animportantdimensionofaneconomy’swelfareconcernsthehealthofits

population.Indeed,recentresearchindicatesthat,intermsofoveralltrends,healthhas

beenoneofthemostimportantcomponentsoftheadvancesinU.S.welfareduringthelast

century(MurphyandTopel2006).Inthispaper,weanalyzewhetherincorporatinghealth

intomeasuresofshort‐termmacroeconomicfluctuationsinGDPorNDP—i.e.,deviations

fromtrends—altersassessmentsofthemagnitudeofmacroeconomicfluctuations.

WeincorporatehealthintomacroeconomicfluctuationmeasuresbyvaluinginU.S.

dollarsanycyclicalchangesinhealthsurroundingboomsandrecessions.Inparticular,we

incorporatemortalityintooutputmeasuresasdepreciationinhumancapitalinaway

analogoustohowNDPtreatsphysicaldepreciation.Wethenconstructmortality‐adjusted

GDPandNDPmeasurestoreexaminetheU.S.andinternationalfluctuationsduringthepast

50years.WefindthatmortalitycovariespositivelywithtraditionalGDPandNDP

measuresovertimeacrossagesandcountries,extendinganexistingliteratureonthe

positivecovariancebetweenmortalityandemployment(Ruhm2000).Whenwemonetize

thesecounter‐cyclicallevelsofhealth,wefindthattheyarequantitativelyimportantand

theU.S.fluctuationslookmilderthantraditionallypresumedwithGDPorNDP.Wefind

thatincorporatingthevalueofmortalitypotentially reversesonethirdof“recessions”

duringthepast50years,andthatadjustingformortalityreducesmeasuredoutput

volatilityinboththeUnitedStatesandinthegroupofdevelopedcountriesconsideredby

about30%.

3  

Toillustratethequantitativemagnitudeofthevalueofmortalityinayear,consider

2010,whentherewereapproximately2.5milliondeathsintheUnitedStates.The

EnvironmentalProtectionAgencyandU.S.DepartmentofTransportationestimatesthe

valueofalifeatroughly$9million(in2010dollars)inrecentregulatoryimpactanalyses

(Viscusi2014,U.S.DepartmentofTransportation2013).Thisimpliesamortalitycostof

approximately$22.5trillionin2010.TheGDPoftheUnitedStatesthatyearwas

approximately$15.8trillion.Althoughthereisongoingdebateregardingwhetherthe

monetaryvalueoflifeforolderindividualsshouldbelargerorsmallerthanthatofyounger

individuals,themagnitudesoftheseback‐of‐the‐envelopecalculationssuggesttheyareof

firstorderimportance.

TheimportanceofhealthlostinayearrelativetoGDPcarriesoverwhenwelookat

changesindeviationsfromtrendwhichwehenceforthrefertoas“fluctuations.”1To

illustrateourmainresults,figure1comparestheseverityofthenineU.S.recessions

between1950and2010asmeasuredbybothGDPandourmortality‐adjustedGDP,which

asnotedtakesintoaccountdepreciationinhumancapital.2Wemeasurethemagnitudeof

eachrecessionasthepeaktotroughrelativetoGDP,asdatedbytheNationalBureauof

EconomicResearch(NBER2013).Eachbarrepresentsthedifferenceinactualoutputatthe

endofrecessionminustheimpliedtrendoutputlevelbetweentheyears1950to2010.In

everyrecessionotherthanin1962and2002,adjustingforthevalueofmortalitysuggests

thatthetotaloutputfluctuationsweremilderthanwhatisimpliedbyunadjustedGDP

becauseofthepositivecorrelationbetweenmortalityandtraditionalGDP.Aremarkable

resultisthatoffsetsinhealthwerelargeenoughtoessentiallyreverseonethirdofthese

recessions.Fromtheperspectiveoftotaleconomicoutput,includingfulldepreciation,

these“recessions”werenotassociatedwithadeclineintotaloutputafteradjustingfor

health.                                                            1Ourpaperlooksatalldeviationsfromtrend,regardlessoftheirfrequency.Itisbeyondthescopeofthispaper(andourdata)tofurthersubdividethedeviationsinto,say,lowfrequencies,mediumfrequencies,seasonalfrequencies,etc.

2InadditiontocalculatingmortalityadjustedGDPwealsocalculatedmortalityadjustedNDP.WereplicatedtheproceedinganalysisusingbothGDPandNDPandfoundquantitativelysimilarresults.WereporttheresultsforGDPratherthanNDPtofacilitatecomparisonsacrosscountries.

 

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5  

healthinoveralleconomicwell‐beinggainsintheUnitedStates.Beckeretal.(2005)have

examinedtheimpactofvaluinghealthforworldinequalityandeconomicconvergence.

JonesandKlenow(2010)haveexaminedtheimpactofincludingothernonmarket

measuresintointernationalcomparisonsofwelfare.Thisliteraturemaybeinterpretedas

addressingthevalueoftheoveralltrendsinhealthandothermeasures.Incontrast,our

researchrelatestothebehaviorofdeviationsfromtrendsovertimebyassessingthecyclical

natureofhealthandhowitrelatestostandardmeasurementsoffluctuations.

Thepaperisorganizedasfollows.Section2illustrateshowphysicaldepreciationis

handledinNDPmeasuresandoutlineshowhumancapitaldepreciationcanbehandledin

ananalogousmanner.Section3describeshowweconstructthemortalityadjustedGDP

series.Section4adjustsrecessionsintheUnitedStatesandabroadforhumancapital

depreciation,lookingathowpeak‐to‐troughchangesareaffected.Section5provides

estimatesforhowthecyclicalityoftheU.S.andinternationaloutputmeasuresarealtered

byincludingthedepreciationofhealth.Finally,Section6concludesbyoutliningresearch

issueswebelieveneedtobeaddressed.Theseincludemorecompletemeasuresofthe

cyclicalnatureofhumancapitalfluctuations,suchaschangesinfertility(entryversusexits

fromthehealthcapitalstock)andeducationalinvestments(appreciationversus

depreciationofthestock).Wearguethattheseunobservedcomponentsofhumancapital

arelikelytobecounter‐cyclical,therebyreinforcingthedocumentedcounter‐cyclicalvalue

ofhealthexaminedhere.

2. HumanandPhysicalCapitalDepreciationintheNationalAccounts

Partofmeasuringeconomicactivityoveraspecifictimeframe(hereafter,acalendar

year)involvesrecognizingthevalueofcapitalisdifferentattheendofthetimeframethan

itwasatthebeginning.Structureshavebeenbuiltordestroyed,waterhasbeenpollutedor

cleaned,etc.Formanypurposesitisdesirabletohavemeasuresofeconomicactivitythat

includethenetchangeinthecapitalstock.

For this reason, national accounts include estimates of physical investment: the

valueofadditionstothenation’sprivatephysicalcapitalstock.Intheexpenditureaccount,

physicalinvestmentissometimesmeasurednetofdepreciation,thatis,the“depreciation”

6  

valueofthedestruction,aging,oreconomicobsolescenceofpre‐existingphysicalassetsis

subtractedfromthevalueofnewassetscreatedduringtheyear.3 Intheincomeaccount,

thesamedepreciation(asusedintheexpenditureaccount)isexcludedfromtheincomesof

the owners of domestic physical capital. Either way, the result is NDP, or Net (of

depreciation)DomesticProduct.

It isalsounderstoodthat therearevaluablehumanandenvironmentalassetsand

that, in principle, their accumulation and depreciation would be counted too (Hartwick

1990, Nordhaus and Kokkelenberg 1999, Jorgenson 2009). Human and environmental

capital data has traditionally been lacking, but economists are making progress, for

example, including environmental depreciation in their measures of economic activity

(Carson 1994). Ideally, national accounts would include the creation and destruction of

humanassetsinthesamewayasitincludesthecreationanddestructionofphysicalassets.

For the purpose ofmeasuringmacroeconomic fluctuations, thesemeasureswill only be

importantiftheyarecorrelatedwiththecyclebecauseiftheyarenot,traditionalmeasures

aresufficient inmeasuringdeviations.Thepurposeofourpaper is tomeasureeconomic

activity over time in a way that begins to include the depreciation of human capital by

estimatingtheamountofdeprecationandsubtractingitfromestimatesofnationalproduct

thataregrossofhumandepreciation.

The BEA’s idealmethod formeasuring depreciation – the loss in an asset’s value

solelyfromthepassageoftime–istoinferanage‐valueprofilefrompurchasepricedatain

awell‐functionresalemarketforusedassets(Fraumeni1997).Depreciationovertheyear

would then be inferred by moving each asset one year further down the profile. For

example, if two‐year old automobiles sell for 90 percent of the price of one‐year old

automobiles, then automobileswould be assumed to depreciate 10 percent during their

secondyear.

In practice, physical asset resale market data is imperfect for this purpose. The

assetssoldintheresalemarketarenotarandomsampleoftheassetsinexistencetheyear

                                                            3TheBEAdefinesdepreciationas“thedeclineinvalueduetowearandtear,obsolescence,accidentaldamage,andaging.”(Fraumeni,1997).

7  

before. For example, some automobiles are totaled as the result of accidents, etc., and

therebyexcluded fromresalemarketsbut theirdestruction isnonethelessdepreciation.4

Whentheresaledataispoorenough,asitisforagreatmanyofthephysicalassetstracked

inthenationalaccounts,adepreciationscheduleisparameterizedandcalibratedforeach

typeofassetandthenassumedtoapplytoall investmentsofthattype(Fraumeni1997).

Geometric depreciation is commonly used for physical assets. Earlier versions of the

nationalaccountssometimesusedaone‐hoss‐shayschedulebasedondataonnormalasset

lifetimes:nodepreciationduringthenormalasset lifeandthen100percentdepreciation

whentheassetlifeisreached.

Wedon’thavearesalemarketinhumans,sowefollowtheparametricapproaches

that have been used to estimate physical depreciation. We take an approach which

calibrates a parametric age profile to recognize that the value lost at a person’s death

depends on the age of the personwho died (Murphy and Topel 2006; Aldy and Viscusi

2008). Specifically we use existing age specific value of statistical life (VSL) tables to

calculatethevalueofdepreciationinthehumancapitalstockresultingfromdeath.

3. ConstructingMortalityAdjustedGDPSeries

WedefinemortalityadjustedGDPasthevalueofGDPminusthevalueoflostlife

(mortality)overthecorrespondingperiod.Thevalueofmortalityreflectsthetotalvalueof

lifelostinthecorrespondingperiodduetodeath.Wecomputethevalueofmortalityasthe

sumofthenumberofdeathsintheperiodweightedbythecorrespondingVSL.

WeusetwoVSLmethodologiestocomputethevalueofmortality.Thefirstmethod

usestheVSLestimatesfromAldyandViscusi(2008)whouseaminimumdistance

estimatorinconjunctionwithhedonicwageregressionstoestimatetheVSLconditionalon

ages18‐62.5Weextrapolatetheirestimatesforthenon‐workingagepopulations.

                                                            4TheBEAusuallymeasuresexpectedor“normal”depreciationratherthanactualdepreciation.Forexample,automobiledepreciationinthenationalaccountsdoesnotreflecttheactualnumberofcarcrashesduringtheyearbutratheranormalrate.However,specialdisasterlosschargesareincludedinthenationalaccountswhenanaturalorman‐madedisaster’sdestructionexceeds0.1percentofGDP.

5SeesectionIVofAldyandViscusi2008forfurtherdetails. 

8  

FollowingViscusiandHersch(2008)wecalculatetheVSLforindividualsovertheageof63

bytreatingtheVSLasthepresentdiscountedvalueoffuturevalueofstatisticallifeyears

(VSLY).6Forindividualsundertheageof18,weassumeaconstantVSLof$3.43mm(which

correspondstotheestimatedVSLfor18yearolds).7ThesecondVSLmethodologyusesthe

ageandgenderspecificVSLprofilesfromMurphyandTopel(2006).MurphyandTopel

calibratesanage‐profilefortheVSLforalife‐cyclemodelwhichincorporatesmultiple

dimensionsofhealth.TheVSLprofileisthencalibratedusingconsumptionandincome

dataandscaledaccordingtoexistingEPAVSLestimates.

Figure2plotsourextrapolatedVSLprofilefromAldyandViscusi(2008)alongwith

theVSLprofilefromMurphyandTopel(2006).Bothage‐VSLprofilesfollowaninverseU

shape.TheMurphyandTopelage‐VSLprofileplacesahighervalueonyoungerindividuals

andlowervalueonelderlyindividualsthanthecorrespondingAldyandViscusiprofile.In

choosingbetweentheAldyandViscusiandMurphyandTopelestimateswefacethetrade‐

offofusinganextrapolatedage‐VSLprofileestimatedfromobserveddataversusa

completeage‐VSLprofileconstructedfromeconomictheory.Regardlessofwhichage‐VSL

profileweusetocomputemortalityadjustedGDP,theprimaryresultsremainthesame:

mortalityadjustmentdampenstheobservedfluctuationsandoverallvolatilityofmeasured

output.

BoththeAldyandViscusiandMurphyandTopelage‐VSLprofilesarecalibratedto

theyear2000.TocalculatethevalueoflifeinotheryearswesimplyscaletheVSLbythe

                                                            6ViscusiandHersch(2008)treatVSLasthediscountedconstantstreamoffutureVSLY.UsingtheVSLestimatesfromAldyandViscusi(2008)wecalculatetheVSLYatage as

where istheremaininglifeexpectancyinyearsatage (aspertheCDCNationalVitalStatisticsReportandtheSocialSecurityAdministration)and isthediscountrate(assumedtobe3%).WeconstructtheVSLforages63+usingtheimpliedVSLYfor62yearolds.

7Asarobustnesscheck,wereplicatetheproceedinganalysisbyassumingaVSLofzeroforindividuals0‐17andfindquantitativelysimilarresults.

9  

trendGDPpercapitainthegivenyearrelativetothetrendGDPpercapitain20008.This

methodologyimplicitlyassumestheelasticityofVSLwithrespecttoincomeisone.While

thereissomedebateintheliteratureabouttheelasticityofVSLwithrespecttoincome,our

unitelasticassumptionisinlinewithpriorresearchandcurrentguidelines.Viscusiand

Aldy(2003)andDoucouliagoset.al(2014)estimateanelasticityofroughly0.5while

researchfromKneiseret.al(2010)andCostaandKahn(2004)estimatetheelasticityis

closerto1.5.WespecifyaVSLincomeelasticityofonewhichisinaccordancewithcurrent

guidelinessetbytheU.S.DepartmentofTransportation(2013)andtheestimatesfrom

Miller(2000).9

                                                            8TrendGDPiscalculatedusingtheHodrickPrescottFilterwithasmoothingparameterof6.5

9SeetheU.S.DepartmentofTransportationMemorandum(2013)forfurtherdiscussionregardingtheelasticityoftheVSLwithrespecttoincome.

 

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11  

4. AdjustingIndividualRecessionsforChangesintheValueofHealth

Thissectionperformsananalysisofthedegreetowhichthecyclicalnatureofhealth

affectsthemeasurementofindividualrecessionsintheU.S.andinternationally.We

considerthepeak‐to‐troughofthemeasuredGDPlevelsandadjustthemforthevalueof

healthdestroyedintheserecessions.

Figures1and3indicatethepeaktotroughofthenineU.S.recessionsoccurring

overtheperiod1950‐2010.Wecalculatepeaktotroughasthedifferenceinactualoutput

attheendofrecessionminustheoutputlevelimpliedbythetrend.Thedifferencein

outputisnormalizedbytheimpliedtrendGDPlevelinthecorrespondingyear.We

computetrendGDPandmortalityadjustedGDPbyassumingbothGDPandthevalueof

mortalitygrowatsomeconstant,butpotentiallydifferentrates.10Figure1iscalculated

usingtheAldyandViscusi(2008)age‐VSLprofilewhilefigure3iscalculatedusingtheage

andgenderspecificVSLestimatesfromMurphyandTopel(2006).Underbothmeasures

mortalityadjustmentessentiallynegatesthe1955and1976U.S.“recessions”.Although

comparable,mortalityadjustmentappearstohaveaslightlybiggerimpactwhencalculated

usingtheAldyandViscusiage‐VSLprofilethanwhencalculatedusingtheMurphyand

TopelageandgenderspecificVSLprofile.ThisislikelyduetothefactthattheAldyand

Viscusiage‐VSLprofileputsahighervalueonindividualsovertheage35thantheMurphy

andTopelprofile.Duetothecomparabilityoftheresultsandforconvenience,the

remaininganalysisisconductedusingtheAldyandViscusiage‐VSLprofile.

                                                            10WecalculatepeaktotroughformortalityadjustedGDPas

where istheactuallevelofmortalityadjustedGDPattheendoftherecession(timet)and isthetrendlevelofmortalityadjustedGDP.TrendmortalityadjustedGDPiscomputedas

where and arethepre‐recessionlevelsofGDPandvalueofmortality, and aretheaverageGDPandvalueofmortalitygrowthratesovertheperiod1950‐2010,and isthelengthoftherecession.ThepeaktotroughcalculationsforunadjustedGDParecalculatedinananalogousmanner.

 

NotesonF

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Figures1and3

achbarmeasuevel.Thedifferrendmortalityrowthratesovecessionsareecession,asm

FIGURE1:

FIGURE3:

3:

uresthedifferrenceinoutpuyadjustedGDvertheperioddatedaspert

measuredusing

RECESSION–

RECESSION–

renceinactuautisnormalizeDPandGDPard1950to2010theNBER.CongGDP,tobep

–PEAKTOTR

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GDP)

GDP)

sionminusthnthecorrespoageGDPandvherdetails.rthepeaktotrecessions).

etrendoutpuondingyear.valueofmorta

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12 

ut

ality

given

13  

Theimplicationsofmortalityadjustmentwhenmeasuringeconomicoutputarenot

uniquetotheUnitedStates.Wereplicatetheprecedingpeaktotroughanalysisforour

unbalancedsampleoftwenty‐oneotherdevelopedcountriescoveringtheperiod1960‐

2010.Recessionsacrosscountriesaredatedusinganalgorithmin‐linewithJorda,

Schularick,andTaylor(2011),Claessens,Kose,andTerrones(2011)andBryandBoschan

(1971)11.ThevalueofmortalityiscalculatedacrosscountriesbyscalingAldyandViscusi’s

(2008)VSLestimatesbytrendGDPpercapita12

     

Where isthevalueofastatisticallifeforanindividualatage ,time incountry

and isthevalueofastatisticallifeasperAldyandViscusi(2008).Asdiscussedin

Section3thismethodologyimpliesanincomeVSLelasticityofonewhichislinewiththe

across‐countryelasticityestimatesfromMiller(2000).

Althoughnotuniformly,figure4andtable1indicatethatthegeneralfinding,that

recessionsappearlessseverewhenadjustingformortality,seemstopersistacross

countries.Thefirstrowoftable1indicatesthatinAustraliaoutputfell,onaverage,by

2.90%belowtrendduringrecessionswhenmeasuredusingGDP.Whenmeasuredusing

mortality‐adjustedGDP,Australianoutput,onaverage,onlyfellby1.24%belowtrend

duringrecessions.Foruniformityandeaseofexpositionwecalculatethepeaktotroughof

eachrecessionineachcountryusingthesamemethodologyasdescribedabove.This

approachcomputestrendGDPandmortalityadjustedGDPundertheassumptionthatboth

mortalityandGDPgrowatconstantrateswithinagivencountry.Overall,wefindthat

adjustingformortalityreducesthedepthoftherecession,onaverage,byoverthree

absolutepercentagepointsofGDPandessentiallynegatedoneinfourrecessionsinour

sample.

                                                            11PeaksaredefinedastheyearprecedingayearoveryeardeclineinrealpercapitaGDPwiththeyear(s)proceedingthepeakdefinedasarecession.TheendoftherecessionismarkedbytheyearinwhichrealGDPpercapitaexceedstherealGDPpercapitalevelinthepeakyearpriortothestartoftherecession.

12TrendGDPiscalculatedusingtheHodrickPrescottFilterwithasmoothingparameterof6.5 

 

NotesonF

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Figure4:

achbarmeasuutputlevel.Threndmortalityrowthratesov

FIGURE4:

uresthedifferhedifferenceiyadjustedGDvertheperiod

RECESSION–

renceinactuainoutputisnoDPandGDPard1950to2010

–PEAKTOTR

 

loutputattheormalizedbytecomputedu0(seetable1

ROUGH(%OF

eendofrecessthetrendGDPusingtheaveranotesandfoo

GDP)

sionminusthPlevelinthecageGDPandvotnote11forf

eimpliedtrenorrespondingvalueofmortafurtherdetails

14 

 

 

 

ndgyear.alitys).

15  

TABLE1:AVERAGERECESSIONDEPTH(AVERAGEPEAKTOTROUGH,%OFGDP)

Country GDP Mortality‐adjustedGDP(AgeSpecificVSL)

Australia ‐2.90% ‐1.24%Austria ‐2.34% ‐1.37%Belgium ‐3.42% ‐2.21%Canada ‐4.93% ‐2.21%Denmark ‐1.40% ‐3.50%Finland ‐8.35% 2.63%France ‐3.40% ‐3.01%Hungary ‐5.65% 2.92%Iceland ‐6.21% ‐3.52%Ireland ‐2.90% ‐0.23%Israel ‐9.06% ‐6.04%Italy ‐3.47% ‐1.92%Japan ‐9.13% ‐4.83%

Luxembourg ‐9.99% ‐3.58%Netherlands ‐3.82% ‐2.89%NewZealand ‐1.09% 1.26%Norway ‐4.72% ‐2.37%Portugal ‐8.52% ‐0.41%Spain ‐7.38% ‐1.45%Sweden ‐5.67% 1.14%U.K. ‐6.74% ‐3.78%U.S. ‐3.41% ‐1.00%

NotesonTable1

Thepeaktotroughofeachrecessioniscalculatedasthedifferenceinactualoutputattheendofrecessionminusthetrendoutputlevel.ThedifferenceinoutputisnormalizedbythetrendGDPlevelinthecorrespondingyear.

TrendmortalityadjustedGDPandGDParecomputedusingtheaverageGDPandvalueofmortalitygrowthratesovertheperiod1950to2010.Seefootnote11forfurtherdetails.Duetoconcernsaboutcompoundingtrendestimationerror,recessionslastinggreaterthan10yearsaredroppedfromthedatasetwhencomputingtheaveragepeaktotrough.

Foreachcountrytable1displaystheaveragepeaktotroughacrossalldefinedrecessionsintherespectivecountry.

U.S.recessionsaredefinedaspertheNBER.Non‐U.S.recessionsaredefinedusingthealgorithmdescribedpreviously

DatafortheU.S.,Ireland,IsraelandNewZealandcoverstheperiods(1950‐2010),(1970‐2009),(1983‐2009),and(1977‐2008)respectively.DataforAustria,Denmark,France,IcelandandSwedencoverstheperiod(1960‐2010).Dataforallothercountriesisfrom1960‐2009.

Countrieswereselectedbasedontheavailability(atleast25continuousyears)ofmortalitydatafromMortality.organdpopulationandGDPdatafromtheWorldBank.

16  

5. AdjustingtheCyclicalityofGDPMeasurementstoChangesinHealth 

InthissectionweadjusttheU.S.andinternationalfluctuationstoincludethevalue

ofmortality.Wefirstextendtheexistingevidencerelatedtomortalityandemploymentin

theU.S.tothebusinesscycle,aswellasextendthatanalysisacrossagesandcountries.We

thenincorporatetheseestimatesintoadjustingthecyclicalityofstandardGDPfluctuations.

Ourmainfindingisthatadjustingformortalityreducesthemeasuredoutputvolatilityby

about30%intheU.S.andinternationally.

5.1. Mortalityandfluctuations

Ifunmeasuredcomponentssuchashealthremainedconstantovertime,calculating

mortality‐adjustedGDPwouldofferlittlevaluefromamacroeconomicpolicyperspective

intermsofanalyzingfluctuations.However,weextendpreviousworkbyshowingthatthe

valueofmortalityispro‐cyclical,exhibitingastrongpositivecorrelationwithGDP.

Previousliteratureidentifiesthenegativerelationshipbetweenmortalityandemployment.

Withouttakinganexplicitstanceonthecausalityoftherelationship,weextendtheir

results,showingthatthereisapositiverelationshipbetweenmortalityandGDPwhichmay

haveequallyorevenmoreimportantimplicationswhenmonetizedusingourmethods.

WeexaminetherelationshipbetweenmortalityandGDPfurtherbyregressinglog

mortalityonlogGDPasdisplayedintable2.Theestimatedrelationshipbetweenlog

mortalityandlogGDPispositiveandsignificantineachspecification.Whenweexamine

mortalitybyagegroup,theresultsindicatethatmortalityamongtheelderlymaypropel

thepositiverelationshipbetweentotalmortalityandoutput.Thisfindingisinaccordance

withtheearlierfindingsfromStevensetal.(2011),whichfindthatoverallpositive

relationshipbetweenunemploymentandmortalityisgeneratedbytheelderlypopulation.

17  

TABLE2:REGRESSIONOFLOGMORTALITYONLOGGDP

AgeGroup (1) (2) (3) (4) All 0.4071*** 0.2670*** 0.2337*** 0.2135** (0.0772) (0.0825) (0.0859) (0.0894) 65+ 0.7567*** 0.3228*** 0.2911*** 0.2293** (0.1155) (0.1045) (0.1040) (0.1045) 25‐64 0.1006 0.1429 0.1495 0.1874* (0.1507) (0.0943) (0.0941) (0.0967) 0‐24 0.1942 0.2066 0.2004 0.1627 (0.1893) (0.1316) (0.1315) (0.1363) TimeTrend X X X AR(1)Correction X FirstDifferences X X

NotesonTable2:

Each age group coefficient is estimated in a separate regression with log age‐group mortality as thedependent variable.Reported coefficients are the coefficientson logGDP. “AR(1) correction” indicatesPrais‐WinstenAR(1)regressions.

One,twoandthreestarsindicatesignificanceat10,5and1percentlevels.

Thedatasetspans1950‐2010withannualobservations.

18  

5.2 AdjustingU.S.macroeconomicfluctuationsforhealth

Atfirstglance,mortality‐adjustedGDPandGDPexhibitsimilarpatternsoverthe

pastfiftyyearsintheU.S.However,uponfurtherexamination,thereareseveraldistinct

differencesbetweentheGDPandmortality‐adjustedGDP.Wecompareandcontrast

mortalityunadjustedandadjustedGDPbyformallydecomposingthembothintotheir

trendanddeviationsfromtrend.

WedecomposelogGDPandthelogvalueofmortalityintoadditivetrendand

deviationfromtrendcomponentsusingbothalineartrendandtheHodrickPrescottFilter

tocalculatethecorrespondingtrends.GDP, ,andthevaluemortality(thenumberof

deathsmultipliedbythecorrespondingVSL), ,canbewrittenintermsoftheirtrendand

cyclicalcomponentssuchthat

where

Asdiscussedpreviously,mortalityadjustedGDP, ,isdefinedasGDPinagivenyear

minusthecorrespondingvalueofmortality

   

Wedefinethecyclicalcomponentofmortality‐adjustedGDPandGDP, and

respectively,asdeviationsfromtrend

Notethatwerefertothesetypeofdeviationsfromtrendas“fluctuations”inmortality‐

adjustedGDPandGDP.Assumingthatboth and followaloglineartrend,weregress

the and onatimetrendtorecoverthecyclicalandtrendcomponentsofboth

19  

GDPaswellasvalueofmortality.13Wealsoestimatethecyclicalandtrendcomponentsof

GDPandmortalityusingtheHodrickPrescottfilter. 

Figure5plotstheestimatedcyclicalcomponentsofGDPandNDPasafractionof

GDP,denoted and respectively.

Thoughthetwoseriesexhibitastrongpositivecorrelationoverthepastfiftyyears,the

cyclicalcomponentofGDPappearsmorevolatilethanthatofmortality‐adjustedGDP,

especiallypriorto1990.Statisticallyspeaking,themeasuredvolatilityofGDPisalmost1.5

timesthatofmortality‐adjustedGDP,4.42%relativeto3.12%.Table3summarizesthe

volatilityofGDPascalculatedusingthetwodecompositionmethods(loglineartrendand

theHodrickPrescottFilter).Notethatsincethetrendcomponent,ascalculatedasperthe

HodrickPrescottFilter,fluctuatesovertime,wecalculatethevolatilityofthetrend

componentaboutaloglineartrend.Underallthreemeasures,thevolatilityofoutput

decreaseswhenweadjustformortality.

                                                            13Formally,weassumethat and arenormallydistributedsuchthat

Thetrendandcyclicalcomponentsareestimatedfromtheregressionresultsas

 

20  

TABLE3:VOLATILITYOFMEASUREDOUTPUT

Measure Std.Dev.of

theCycleStd.Dev.oftheCycle

Std.Dev.oftheTrend

GDP 4.42% 1.45% 4.07% Mortality‐adjustedGDP 3.12% 1.30% 2.63% LogLinearTrend X HodrickPrescottFilter X X

NotesonTable3:

The cyclical and trend components of GDP andmortality are estimated using a loglineartrendandtheHodrickPrescottFilter.

The standard deviation of the trend component expresses the standard deviation of the trend (ascalculatedusingtheHodrickPrescottFilter)aboutalineartimetrend.

Mortality‐adjustedGDPiscalculatedusingtheagespecificVSLestimatesfromAldyandViscusi(2008)describedinSection3.

Thedatasetspans1950‐2010withannualobservations

 

N

NotesonFigure5:

Thecyclicalan

Mortality‐adju

ndtrendcompone

ustedGDPiscalcu

FIGURE5:CYCL

entsofGDPandm

ulatedusingtheag

LICALCOMPONENT

mortalityareestim

gespecificVSLest

TSOFGDPANDM

matedusingalogli

timatesfromAldy

MORTALITY‐ADJU

ineartrend.

yandViscusi(2008

USTEDGDP

8)asdescribedinnSection3.

21 

22  

5.3 Adjustinginternationalfluctuationsforhealth

ThissectionextendsthepreviousanalysisfortheU.S.tothetwenty‐oneother

industrializedcountries.Ouranalysisconfirmspreviousfindingssuggestingthatthe

positiverelationshipmortalityandGDPextendsbeyondtheUnitedStatestoother

industrialcountriesthoughtherelationshipisfairlyheterogeneous.Ourresultssuggest

thattheimplicationsofadjustingfluctuationsformortalitymayactuallybemoreimportant

forotherpartsoftheindustrializedworldrelativetotheUnitedStates.

Previousresearchfocusedonthepro‐cyclicalityofmortalitybyexaminingthe

relationshipbetweenthemortalityandunemploymentratesacrosscountries.Usingpanel

datafrom21OECDcountries,GerdthamandRuhm(2006)findthatmortalityratesare

negativelycorrelatedwithunemploymentrates.Wefindqualitativelysimilarresultswhen

examiningtherelationshipbetweenmortalityandGDPoverallthoughwefindthereis

substantialheterogeneityacrosscountrieswhichreinforcestheneedformortality

adjustmentinnationalaccounts.

Usingourpaneloftwenty‐twocountriesovertheperiod1960‐2010,weregressthe

logofacountry’stotalmortalityonlogGDPwhilecontrollingforcountrytimeandfixed

effects.TheresultsoftheregressionsoflogmortalityonlogGDParedisplayedintable4.

AlthoughtheestimatedrelationshipbetweenlogmortalityandlogGDPispositiveinthree

specifications,andpositiveandsignificantintwoofthespecifications,thepooledcountry

elasticityestimatesaresubstantiallylowerthanthecorrespondingU.S.estimatesintable2.

WerunadditionalspecificationswhereweallowtheeffectoflogGDPonlogmortalityto

varyatthecountrylevelwhilestillusingcountryfixedandtrendeffects.Theestimated

mortality/GDPelasticityestimatesarepositiveandsignificantforoverhalfofthecountries

inthesample.However,therelationshipbetweenGDPandmortalityisheterogeneous

acrosscountrieswithestimatedelasticitiesrangingfrom‐0.30to0.80.

23  

TABLE4:REGRESSIONOFLOGMORTALITYONLOGGDP

(1) (2) (3) (4) LogGDP 0.0910*** 0.0525** 0.0051 ‐0.0236 (0.0143) (0.0239) (0.0316) (0.0352) TimeTrend X X X AR(1)Correction X FirstDifferences X X

NotesonTable4:

Reportedcoefficientsarethecoefficientson logGDP.“AR(1)correction” indicatesPrais‐WinstenAR(1)regressions.

One,twoandthreestarsindicatesignificanceat10,5and1percentlevels.

All specifications include country specific dummy variables. When included, time trends are countryspecific

DatafortheIreland,IsraelandNewZealandcoverstheperiods(1950‐2010),(1970‐2009),(1983‐2009),and(1977‐2008)respectively.DataforAustria,Denmark,France,Iceland,SwedenandtheU.S.coverstheperiod(1960‐2010).Dataforallothercountriesisfrom1960‐2009.Observationsareannual.

Countrieswereselectedbasedontheavailability(at least25continuousyears)ofmortalitydata fromMortality.organdpopulationandGDPdatafromtheWorldBank.

FollowingSection5.2,weformallydecomposemortality‐adjustedGDPandGDPinto

theirtrendanddeviationfromtrendcomponentsforeachcountryinoursample.14Figures

6‐8summarizethevolatilityofGDPascalculatedusingthetwodecompositionmethods

(loglineartrendandtheHodrickPrescottFilter).Thegrayandblackbarsplotthestandard

deviationofthecyclicalcomponentofmortality‐adjustedGDPandGDPrespectivelyover

thepastfiftyyears.Sincethetrendcomponent,ascalculatedaspertheHodrickPrescott

Filter,fluctuatesovertime,wecalculatethevolatilityofthetrendcomponentaboutalog

                                                            14 Mortality‐adjusted GDP is calculated using the gender and age specific VSL estimates from Aldy and Viscusi 

(2008) described in Section 3. 

24  

lineartrendinfigure8.Mortalityadjustmentreducesthemagnitudeofdeviationsfroma

loglineartrendfor17ofthe22countriesinthesample.However,whencalculatinga

businesscycleaspertheHodrickPrescottFilter,mortalityadjustmentreducesthe

varianceofthecyclicalcomponentofGDPforonlyfourofthecountriesinthesample.

Figures7and8indicatethatmortalityadjustmentappearstohaveabiggerimpactonthe

volatilityofthetrendcomponentofGDPrelativetothecyclicalcomponentofGDP.This

suggeststhatthelowfrequencyprocyclicalmovementsinmortalityarewhathelpsbuffer

thebusinesscycle.Theinternationalresultsindicatetheimportanceofunderstandingthe

effectmortalityandotherunmeasuredcomponentsofoutputhaveonfluctuationsextends

beyondtheU.S.

 

FIGURE

FIGUR

FIGURE6:V

E7:VOLATILI

RE8:VOLATIL

VOLATILITYOF

TYOFGDPV

LITYOFGDPV

FGDPVSMO

SMORTALITY

VSMORTALIT

RTALITY‐ADJU

Y‐ADJUSTEDG

TY‐ADJUSTED

USTEDGDP(

GDP(CYCLICA

GDP(TREND

(LOGLINEAR

ALCOMPONEN

DCOMPONENT

TREND)

NT–HPFILTE

T–HPFILTER

25 

ER)

R)

26  

6. ConcludingRemarks

WeexaminedthemacroeconomicfluctuationsintheUnitedStatesandglobally

duringthepast50yearstakingintoaccountthedepreciationofhealth(humancapital)in

GDPmeasures.Becausemortalitytendstobepro‐cyclical,fluctuationsinstandardGDPare

inpartoffsetbyhumandepreciation;boomsarenotasvaluablebecauseofgreater

mortality,andrecessionsarenotasbadbecauseoflowermortality.Consequently,the

fluctuationsintheUnitedStatesandelsewhereappearmilderthancommonlymeasured.

Wefoundthatmany“recessions”duringthepast50yearswerenotactuallyrecessions,

andthatadjustingformortality,onaverage,reducestheseverityofbothU.S.and

internationalrecessionsbymorethan2%ofGDPandreducesmeasuredfluctuations

aroundtrendby30%.

Ouranalysisraisesimportantissuesformorefullyincorporatinghumancapital

componentsintooutputmeasures.OurmeasureofmortalityadjustedGDPonlyaccounted

fordeaths,therebyimplicitlyonlyconsideringadiminishingratherthanapotentially

appreciatingstockofhumancapital.Furtheranalysisshouldconsiderreplenishmentsof

thestockintermsoffertilityandimmigration/emigration.Itshouldalsoconsider

appreciationthroughhumancapitalinvestmentssuchaseducation.Previousempirical

workremainsinconclusiveregardingthecyclicalityoffertilityratesgiventhattheydepend

oncounteractingincomeandsubstitutioneffectsinducedbythebusinesscycle(Butzand

Ward1979;Mocan1990;AhnandMira2002).Incorporatingbirthspresentsfurther

challengesasitisnotobvioushowtoincorporatethevalueofanewlife.Doesoneinclude

theparents’value,thechild’s,orboth?Similarchallengesexistinvaluingnetimmigration

inassessingthevalueofresidentaliensversuscitizens.DellasandSakellaris(2003)have

documentedthecounter‐cyclicalnatureofformalhumancapitalinvestments.Theseshould

beincorporatedintofluctuationsmeasuresasappreciationduringrecessionsandthusmay

offsettraditionalmeasures,justasourmortality‐basedanalysisdid.Nevertheless,weview

thiseffortastoospeculativeatthispointbothinmethodsanddataavailability,particularly

sovaluingnewbornsthroughpotentiallycyclicalfertility.Furthermore,onemaynotehere

thatourapproachisconsistentwithcurrentgovernmentpracticeinvaluinghumanlife,e.g.

27  

inassessingEPAorFDApolicies,whichalsoonlyfocusesonthevalueoftheliveslostas

opposedtovaluingthosestillalive.

Futureanalysisshouldalsoconsiderthefulllifecycleofdepreciationinhuman

capital.Ouranalysisdepreciatedthehumancapitalstockonlyatdeath,asopposedto

depreciatingorappreciatingalifestillnotlost.Futureresearchshouldalsoinvestigate

whethergradualdepreciationinhumancapitalaffectsourresultsonhowfluctuationsin

mortalityandmarketGDParecorrelated.Foragivenage‐profileofthevalueofahuman

life,theanalogtodepreciationprofilesofphysicalassets,onemayenvisionvaluingthe

currenthumancapitalstockbasedontheagedistributioninthepopulation.Thiswillbe

contingentonmorbiditypatternsbyage.Cyclicalpatternsinmorbidity,forexamplecaused

bymentalhealthorheartdisease,mayamplifyfluctuationsandshouldalsobe

incorporated.

Ourmainargumentisthatthereareclearwaysofextendingtraditionalmeasuresof

fluctuationsandtheeffectsofpoliciesaimedatcurbingthem,beyondsimplycounting

markettransactions.Moreworkisneededtomakesuchextensionsoperational.

Ingeneral,theexistingevidenceonthecyclicalityofhumancapitalmaysuggestthat

unobservedcomponentsofvaluearealsoindeedcounter‐cyclical,inwhichcasethey

reinforceratherthancounteractthedocumentedcounter‐cyclicalvalueofhealthexamined

here.Examiningthecyclicalityofpreviouslyunmeasuredcomponentsdiffersfrom

previousresearchthathasfocusedonmissingcomponentsinthelevelofeconomicoutput.

However,whatmattersforassessingthevalueofpoliciestryingtomitigatefluctuationsis

nottheleveloftheunmeasuredcomponentsofoutput(suchasleisure,health,and

education,forexample),buttheircyclicality.Ifunmeasuredcomponentsdonotvarywith

themeasuredcomponents,themuchofthecostsoffluctuationsiscapturedbymeasured

GDP.Webelieve,therefore,thatmoreresearchiswarrantedonthequantitative

importanceoffluctuationsinunmeasuredcomponentsofnationaloutput.

28  

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