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Estimating The Causal Effect of Income on Health: Evidence from Post Reunification East Germany

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Author Info

  • Paul Frijters
  • John P. Haisken-DeNew
  • Michael Shields

Abstract

In this paper we investigate if there was a causal effect of changes in current and 'permanent' income on the health of East Germans in the years following reunification. Reunification was completely unanticipated and therefore can be seen as a providing some exogenous variation, which resulted in a substantial increase in average household incomes for East Germans. Our data source is the German Socio-Economic Panel (GSOEP) between 1991 and 1999, and we fit both random and fixed-effects estimators to our ordinal health measures. Whilst the exogeneity of reunification allows us to establish the causality between income and health, the fixed-effects methodology additionally enables us to control for individual unobservable heterogeneity such as parental background and general attitudes to health. We also provide new evidence on how major life-events impact on health, and we pay close attention to the issue of panel attrition, given that there might be endogenous exits from the panel if the unhealthy are more likely to drop out of the sample. Using cross-sectional variations in income and health we find evidence of a significant positive effect of current income on health. However, after controlling for heterogeneity and using a new decomposition of the fixed-effects estimates, we find no evidence that increased income leads to improved health. This is the case with respect to current income and a measure of 'permanent' income and two alternative definitions of health. We also find no evidence of an effect of regional income on health.

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Bibliographic Info

Paper provided by Centre for Economic Policy Research, Research School of Economics, Australian National University in its series CEPR Discussion Papers with number 465.

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Length: 36 pages
Date of creation: Jul 2003
Date of revision:
Handle: RePEc:auu:dpaper:465

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Related research

Keywords: Income; Health; German Reunification; Panel Data; Attrition;

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References

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  1. Deaton, A., 1998. "Aging and Inequality in Income and Health," Papers 181, Princeton, Woodrow Wilson School - Development Studies.
  2. Bird, Edward J. & Frick, Joachim R. & Wagner, Gert G., 1998. "The Income of Socialist Upper Classes during the Transition to Capitalism: Evidence from Longitudinal East German Data," Journal of Comparative Economics, Elsevier, vol. 26(2), pages 211-225, June.
  3. Christopher J. Ruhm, 2000. "Are Recessions Good For Your Health?," The Quarterly Journal of Economics, MIT Press, vol. 115(2), pages 617-650, May.
  4. Anne Case & Darren Lubotsky & Christina Paxson, 2002. "Economic status and health in childhood: the origins of the gradient," Working Papers 262, Princeton University, Woodrow Wilson School of Public and International Affairs, Center for Health and Wellbeing..
  5. Ettner, Susan L., 1996. "New evidence on the relationship between income and health," Journal of Health Economics, Elsevier, vol. 15(1), pages 67-85, February.
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  7. Anne Case, 2001. "Does Money Protect Health Status? Evidence from South African Pensions," Working Papers 205, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
  8. Guillaume R. Frechette, 2001. "Random-effects ordered probit," Stata Technical Bulletin, StataCorp LP, vol. 10(59).
  9. Paul Frijters & John P. Haisken-DeNew & Michale A. Shields, 2001. "The Value of Reunification in Germany: An Analysis of Changes in Life Satisfaction," Department of Economics - Working Papers Series 828, The University of Melbourne.
  10. Moon-Kee Kong & Hoe-Kyung Lee, 2001. "Income-related inequalities in health: some evidence from Korean panel data," Applied Economics Letters, Taylor & Francis Journals, vol. 8(4), pages 239-242.
  11. Butler, J S & Moffitt, Robert, 1982. "A Computationally Efficient Quadrature Procedure for the One-Factor Multinomial Probit Model," Econometrica, Econometric Society, vol. 50(3), pages 761-64, May.
  12. Guillaume R. Frechette, 2001. "Update to random-effects ordered probit," Stata Technical Bulletin, StataCorp LP, vol. 10(61).
  13. Lindahl, Mikael, 2002. "Estimating the Effect of Income on Health and Mortality Using Lottery Prizes as Exogenous of Variation in Income," IZA Discussion Papers 442, Institute for the Study of Labor (IZA).
  14. Marcel Kerkhofs & Maarten Lindeboom, 2000. "Health and Work of the Elderly: Subjective Health Measures, Reporting Errors and the Endogenous Relationship Between Health and Work," Econometric Society World Congress 2000 Contributed Papers 0653, Econometric Society.
  15. Paul Contoyannis & Martin Forster, 1999. "'Our healthier nation'?," Health Economics, John Wiley & Sons, Ltd., vol. 8(4), pages 289-296.
  16. James P. Smith, 1999. "Healthy Bodies and Thick Wallets: The Dual Relation between Health and Economic Status," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 145-166, Spring.
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Cited by:
  1. Doyle, Orla & Harmon, Colm & Walker, Ian, 2007. "The Impact of Parental Income and Education on Child Health : Further Evidence for England," The Warwick Economics Research Paper Series (TWERPS) 788, University of Warwick, Department of Economics.
  2. David Cantarero & Marta Pascual, 2005. "Regional Differences In Health In Spain - An Empirical Analysis," ERSA conference papers ersa05p551, European Regional Science Association.
  3. Doyle, Orla & Harmon, Colm P. & Walker, Ian, 2005. "The Impact of Parental Income and Education on the Health of their Children," IZA Discussion Papers 1832, Institute for the Study of Labor (IZA).
  4. Qiu, Tian, 2007. "The Adjusted Measure of Body Mass Index and its Impact on Health," MPRA Paper 6270, University Library of Munich, Germany.

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