Human Capital Approach

A method for valuing productivity lost to illness, disability, or premature death, based on the market wages the person would otherwise have earned.

Source: Rice 1966

It values time lost to illness, disability or premature death at the earnings the person would otherwise have received, treating market wages as a measure of the output forgone. For absence, the calculation multiplies days lost by daily earnings. For premature death, it sums the earnings the person would have received over their remaining working life, discounted to present value. The approach treats a person's productive capacity as an asset and illness as a loss of the return that asset would have generated. Because the calculation rests on earnings over a working life, the figure depends heavily on the discount rate applied and on assumptions about future wage growth, both of which are frequently left implicit.

Source: Rice 1966

The friction cost method holds that an employer replaces an absent worker after a period of adjustment, so production is restored and the loss to the economy ends there. It therefore values only the friction period, together with the cost of recruiting and training the replacement. For long absences and premature death the two approaches diverge sharply, with the friction method producing much smaller figures, and the difference can determine whether an intervention appears worthwhile. The choice between them is therefore not a technical detail but a decision about whose loss is being measured, the individual's or the economy's, and analyses should state which question they answer.

Source: Koopmanschap et al. 1995

That valuing time by earnings assigns lower cost to illness in people who earn less, so the same period of ill health counts for more in a higher earner. That it assigns no value at all to time spent outside paid employment, which excludes retired people, unpaid carers and those doing household work. And that it assumes full employment, since in an economy with unemployment the output of an absent worker may be produced by someone else who would otherwise not have worked. It also assumes that earnings measure the value of what a person produces, which holds only under competitive labour market conditions that rarely obtain in full.

Source: Drummond et al. 2015

It remains common in cost-of-illness studies, where the purpose is to describe the economic burden of a condition rather than to inform a specific funding decision, and where the larger figure it produces is not being compared against a threshold. It is also used where the analysis takes a societal perspective and no friction period can be established. Appraisal frameworks specifying a payer perspective exclude productivity costs altogether, so the question does not arise. It also persists in litigation and compensation settings, where the question genuinely concerns what an individual has lost rather than what an economy has forgone.

Source: Rice 1966

The method should be named explicitly, since a productivity figure means very different things under the two approaches. The wage data used and whether they were adjusted for employment rates should be stated. Results should be reported with and without the productivity component, because it frequently exceeds the direct medical costs and its inclusion is contested. And where a preference-based health measure is also used, the risk of counting the same consequence twice should be addressed rather than assumed away. Presenting the result both ways, on the human capital and the friction basis, is the most useful treatment where the analysis is intended to inform a decision rather than to describe a burden.

Source: Drummond et al. 2015