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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. Kahn, Matthew E, 1998. "Health and Labor Market Performance: The Case of Diabetes," Journal of Labor Economics, University of Chicago Press, vol. 16(4), pages 878-99, October.
    2. Haveman, Robert & Wolfe, Barbara & Kreider, Brent & Stone, Mark, 1994. "Market Work, Wages, and Men's Health," Staff General Research Papers 10233, Iowa State University, Department of Economics.
    3. Juergen Jung & Chung Tran, 2011. "Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010," Working Papers 201102, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
    4. Michaud, Pierre-Carl & van Soest, Arthur, 2004. "Health and Wealth of Elderly Couples: Causality Tests Using Dynamic Panel Data Models," IZA Discussion Papers 1312, Institute for the Study of Labor (IZA).
    5. James M. Poterba & Steven F. Venti & David A. Wise, 2010. "The Asset Cost of Poor health," NBER Working Papers 16389, National Bureau of Economic Research, Inc.
    6. 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.
    7. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the Elderly Save? The Role of Medical Expenses," NBER Working Papers 15149, National Bureau of Economic Research, Inc.
    8. 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.
    9. Haveman, Robert, et al, 1995. "The Loss of Earnings Capability from Disability/Health Limitations: Toward a New Social Indicator," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 41(3), pages 289-308, September.
    10. 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.
    11. Currie, Janet & Gruber, Jonathan, 2001. "Public health insurance and medical treatment: the equalizing impact of the Medicaid expansions," Journal of Public Economics, Elsevier, vol. 82(1), pages 63-89, October.
    12. 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.
    13. 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.
    14. Samuel Marshall & Kathleen M. McGarry & Jonathan S. Skinner, 2010. "The Risk of Out-of-Pocket Health Care Expenditure at End of Life," NBER Working Papers 16170, National Bureau of Economic Research, Inc.
    15. Grossman, Michael, 1972. "On the Concept of Health Capital and the Demand for Health," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 223-55, March-Apr.
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