Health Shocks and the Evolution of Earnings over the Life-Cycle

63 Pages Posted: 6 Nov 2018 Last revised: 17 Jun 2020

See all articles by Elena Capatina

Elena Capatina

UNSW Australia Business School, School of Economics

Michael P. Keane

University of New South Wales

Shiko Maruyama

University of Technology Sydney (UTS) - Economics Discipline Group

Date Written: June 14, 2020

Abstract

We study the contribution of health shocks to earnings inequality and uncertainty in labor market outcomes. We calibrate a life-cycle model of labor supply and savings that incorporates health and health shocks. Our model features endogenous wage formation via human capital accumulation, employer sponsored health insurance, and means-tested social insurance. We find a substantial part of the impact of health shocks on earnings arises via reduced human capital accumulation. Health shocks account for 15% of lifetime earnings inequality for U.S. males, with two-thirds of this due to behavioral responses. In particular, it is optimal for low-skill workers – who often lack employer sponsored insurance – to curtail labor supply to maintain eligibility for means-tested transfers that protect them from high health care costs. This causes low-skill workers to invest less in human capital. Provision of public health insurance can alleviate this problem and enhance labor supply and human capital accumulation.

Keywords: Health, Health Shocks, Human Capital, Income Risk, Precautionary Saving, Earnings Inequality, Health Insurance, Welfare

JEL Classification: D91, E21, I14, I31

Suggested Citation

Capatina, Elena and Keane, Michael P. and Maruyama, Shiko, Health Shocks and the Evolution of Earnings over the Life-Cycle (June 14, 2020). UNSW Business School Research Paper 2018-14b, Available at SSRN: https://ssrn.com/abstract=3278425 or http://dx.doi.org/10.2139/ssrn.3278425

Elena Capatina

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Michael P. Keane (Contact Author)

University of New South Wales ( email )

Sydney, NSW
Australia

Shiko Maruyama

University of Technology Sydney (UTS) - Economics Discipline Group ( email )

Haymarket
Sydney, NSW 2007
Australia

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