Life Cycle Effects of Health Risk

This paper studies four channels through which health affects individuals: (1) productivity, (2) medical expenditures, (3) available time and (4) survival probabilities, and assesses their roles in determining labor supply, asset accumulation and welfare. Using a life-cycle model calibrated to the U.S. for different education groups, I evaluate the relative importance of each channel and quantify the interactions between them. First, all four channels are important for the macroeconomic variables studied, but the productivity and time endowment channels are the most dominant. I also show that due to significant interactions between channels, they need to be studied within a unified framework over the entire life-cycle. Second, health has larger effects for the non-college than college educated, explaining 35% and 31% of the differences in labor supply and degree of reliance on government transfers across groups, respectively. Health risk accounts for 9% of disposable income inequality for the non-college educated, leading to larger fractions of precautionary savings for this group despite the presence of a consumption floor.