Health Shocks and the Evolution of Earnings over the Life-Cycle
63 Pages Posted: 6 Nov 2018 Last revised: 17 Jun 2020
Date Written: June 14, 2020
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: Suggested Citation