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A Life Cycle Approach to the Mechanism Connecting Health Inequality and Earnings Inequality

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  • Maria Prados

    (Columbia University)

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    Abstract

    Understanding the sources of earnings inequality and the consequences of earnings risk is important for policy. This paper incorporates the health aspect to this problem and studies its implications for the US economy, which has not so far been done in the strand of the macroeconomics literature that studies and measures sources of inequality and earnings risk. The premise is that earnings and health are closely intertwined for any individual through an economic mechanism. On the one hand, health care is important from the worker's perspective not only because of the value he assigns to his own health and longevity, but also because of the direct effects that health has over the potential productivity of each individual. On the other hand, health care is a private good, so those with higher earnings can afford more health care if desired, than those with lower earnings. The main result of taking into account the health dimension is that income disparities give rise to health disparities, and at the same time, health outcomes shape potential earnings. I build a macroeconomic framework that incorporates these characteristics of health care into a model where workers face risky labor earnings as well as shocks to health, and calibrate it to match moments from US data. This framework will provide insight about the relevance of health as determinant of lifetime earnings risk and persistence of earnings shocks and allow to analyze the effects that different configurations of the health care sector may have on the idiosyncratic productivity risk that workers face through their lifetimes.

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    File URL: http://www.economicdynamics.org/meetpapers/2012/paper_1145.pdf
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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 1145.

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    Date of creation: 2012
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    Handle: RePEc:red:sed012:1145

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    1. 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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    3. Karsten Jeske & Sagiri Kitao, 2007. "U.S. tax policy and health insurance demand: can a regressive policy improve welfare?," Working Paper 2007-13, Federal Reserve Bank of Atlanta.
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    12. Lee, Lung-Fei, 1982. "Health and Wage: A Simultaneous Equation Model with Multiple Discrete Indicators," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(1), pages 199-221, February.
    13. Pierre-Carl Michaud & Arthur van Soest, 2004. "Health and Wealth of Elderly Couples: Causality Tests Using Dynamic Panel Data Models," Working Papers 191, RAND Corporation Publications Department.
    14. Dow, W & Gertly, P & Schoeni, R-F & Strauss, J & Thomas, D, 1997. "Health Care Prices, Health and Labor Outcomes : Experimental Evidence," Papers 97-01, RAND - Labor and Population Program.
    15. Currie, Janet & Gruber, Jonathan, 1996. "Health Insurance Eligibility, Utilization of Medical Care, and Child Health," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 431-66, May.
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