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• Authors' Response to Comment by Peter A West
  Deborah Schofield, Rupendra Shrestha, Michelle Cunich, Megan Passey, Lennert Veerman, Robert Tanton and Simon Kelly
  Published on: 6 February 2017
• Counting the right costs of diabetes
  Peter A West
  Published on: 10 January 2017

• Published on: 6 February 2017

  Authors' Response to Comment by Peter A West

  • Deborah Schofield, Academic University of Sydney
  • Other Contributors:
    • Rupendra Shrestha, Academic
    • Michelle Cunich, Academic
    • Megan Passey, Academic
    • Lennert Veerman, Academic
    • Robert Tanton, Academic
    • Simon Kelly, Academic

  Peter A West wrote a letter primarily suggesting the use of friction cost method to evaluate the economic impacts of lost PLYs because of diabetes in our paper.
  There is an ongoing debate on which of the two methods (human capital approach or friction cost) is the best method for measuring the economic evaluation of lost productivity. The human capital approach counts any time out of the labour force due to ill health as lost labour productivity because of the reduced work capacity of the individual, whereas the friction cost method takes the employer’s perspective and only counts a portion of the time until a new employee can be hired to take over the job, including undertaking any training required, of the individual who was no longer able to work, with a friction period being typically up to 3 months. We chose to use the human capital approach in our paper for several reasons:
  1. Australia has one of the lowest unemployment rates, currently around 5.7%, among the OECD nations (https://data.oecd.org/australia.htm).
  2. There are numerous areas of the workforce in severe shortage in Australia, making it harder to replace a worker when they leave, let alone an experienced 45-64 years age group worker (https://www.employment.gov.au/occupational-skill-shortages-information).
  3. Finally, Australia has significant barrier...

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  Peter A West wrote a letter primarily suggesting the use of friction cost method to evaluate the economic impacts of lost PLYs because of diabetes in our paper.
  There is an ongoing debate on which of the two methods (human capital approach or friction cost) is the best method for measuring the economic evaluation of lost productivity. The human capital approach counts any time out of the labour force due to ill health as lost labour productivity because of the reduced work capacity of the individual, whereas the friction cost method takes the employer’s perspective and only counts a portion of the time until a new employee can be hired to take over the job, including undertaking any training required, of the individual who was no longer able to work, with a friction period being typically up to 3 months. We chose to use the human capital approach in our paper for several reasons:
  1. Australia has one of the lowest unemployment rates, currently around 5.7%, among the OECD nations (https://data.oecd.org/australia.htm).
  2. There are numerous areas of the workforce in severe shortage in Australia, making it harder to replace a worker when they leave, let alone an experienced 45-64 years age group worker (https://www.employment.gov.au/occupational-skill-shortages-information).
  3. Finally, Australia has significant barriers to moving to take up a new position as it is a very large country (78.2% size of the USA; 31.2 times the size of the UK) resulting in significant disruption to families, especially where two parents are working.
  Our approach is consistent with the Australian Government’s policy to promote the employment of older workers and indeed related policy proposals to increase the age of eligibility for Age Pension to 70 years. There are two fronts from which economic policy should be directed to achieve the economic growth required to support an ageing population: one aiming to reduce premature retirement due to ill health (or any other reason), and another targeting the creation of jobs for the unemployed and new workers entering the job market.

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  Conflict of Interest:
  None declared.

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• Published on: 10 January 2017

  Counting the right costs of diabetes

  • Peter A West, Health Economist Peter West Associates Ltd.

  So far as I can see, (and apologies if I have missed something) in common with many others, the authors have failed to include the effect on GDP and taxes and welfare payments of replacement of sick workers by healthy unemployed workers and new workers entering the labour market. Similarly, if unemployed workers take jobs from those with diabetes no longer able to work, then their unemployment benefits will end and there will be a saving in welfare payments to the economy. The tax paid by those now working will offset the tax lost from those ceasing work.

  Overall, the level of GDP in developed countries is more likely to be determined by the levels of domestic demand, world trading conditions, currency exchange rates etc. than by the availability of a relatively small number of workers with diabetes, if their employment could be continued.

  Welfare payments and taxes are also conventionally treated in economics as transfer payments which have no overall effect on goods and services. If anything, additional welfare payments may benefit the economy in the short run as poorer people on benefits have a higher propensity to spend than richer tax payers. It is usually not acceptable to add direct resource costs for treatment to transfer payments.

  I suggest the authors look at this again and at least include the potential effects of worker replacement, given the current levels of unemployment in Australia. They should examine the literature on the friction c...

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  So far as I can see, (and apologies if I have missed something) in common with many others, the authors have failed to include the effect on GDP and taxes and welfare payments of replacement of sick workers by healthy unemployed workers and new workers entering the labour market. Similarly, if unemployed workers take jobs from those with diabetes no longer able to work, then their unemployment benefits will end and there will be a saving in welfare payments to the economy. The tax paid by those now working will offset the tax lost from those ceasing work.

  Overall, the level of GDP in developed countries is more likely to be determined by the levels of domestic demand, world trading conditions, currency exchange rates etc. than by the availability of a relatively small number of workers with diabetes, if their employment could be continued.

  Welfare payments and taxes are also conventionally treated in economics as transfer payments which have no overall effect on goods and services. If anything, additional welfare payments may benefit the economy in the short run as poorer people on benefits have a higher propensity to spend than richer tax payers. It is usually not acceptable to add direct resource costs for treatment to transfer payments.

  I suggest the authors look at this again and at least include the potential effects of worker replacement, given the current levels of unemployment in Australia. They should examine the literature on the friction costs of worker replacement.

  If it helps the reader to think about it, consider retirement at 65 or 70. The apparent loss of wages and lost taxes and additional benefits paid out could appear to be crippling the economy if we exclude the effects of replacement workers. Should we ban retirement in the name of economic growth? Not while we have unemployed workers in sufficient numbers and with the right skills (which we may not always have, of course, but which can be remedied by immigration in many developed countries).

  In common with others, the authors show that diabetes has big direct and indirect costs. I doubt there is a health minister in any developed country who is not aware, or who soon finds out, that diabetes is a BIG problem. Generating estimates of just how big is not particularly useful in my view, particularly when they tend to exaggeration.

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  Conflict of Interest:
  None declared.

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