The Effect of Income on Health: Using the Coal Boom as a Natural Experiment

This study estimates the effect of positive income shocks on health conditions. We analyze the birth weight and mortalities of babies born in the US states of Kentucky, Ohio, and West Virginia during the early 1970s. Babies who were born in a coal-mining county benefited from the boom of the coal mining industry, whereas other babies did not. During the period, there was a sudden increase in the price of coal, resulting from an increase in the price of oil, which, in turn, resulted from an oil price embargo by the Organization of the Petroleum Exporting Countries. We use per capita personal income, which is the average income of people living in a county, as a measure for income. However, it is well known that there is an endogeneity issue when estimating the effect of income on health. To overcome the problem, we adopted the instrumental variable approach and use coal price as an instrument for income. We find that an exogenous $1,000 (in 1984 dollars) increase in income increases birth weight by 56 g. In addition, low birth weight would decrease by 0.9% point, which is 12% of the sample mean (7.6%). Our study avoids possible bias from compositional change by focusing on the period directly before and after the economic shock.