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How Important Is Health Inequality for Lifetime Earnings Inequality?

Author

Listed:
  • Roozbeh Hosseini

    (University of Georgia)

  • Karen A. Kopecky

    (Emory University)

  • Kai Zhao

    (University of Connecticut)

Abstract

Using a dynamic panel approach, we provide empirical evidence that negative health shocks reduce earnings. The effect is primarily driven by the participation margin and is concentrated in less educated and poor health individuals. We build a dynamic, gen-eral equilibrium, lifecycle model that is consistent with these findings. In the model, individuals, whose health is risky and heterogeneous, choose to either work, or not work and apply for social security disability insurance (SSDI). Health impacts individuals’ productivity, SSDI access, disutility from work, mortality, and medical expenses. Cali-brating the model to the United States, we find that health inequality is an important source of lifetime earnings inequality: nearly 29 percent of the variation in lifetime earnings at age 65 is due to the fact that Americans face risky and heterogeneous life-cycle health profiles. A decomposition exercise reveals that the primary reason why individuals in the United States in poor health have low lifetime earnings is because they have a high probability of obtaining SSDI benefits. In other words, the SSDI program is an important contributor to lifetime earnings inequality. Despite this, we show that it is ex ante welfare improving and, if anything, should be expanded.

Suggested Citation

  • Roozbeh Hosseini & Karen A. Kopecky & Kai Zhao, 2020. "How Important Is Health Inequality for Lifetime Earnings Inequality?," Working papers 2020-20, University of Connecticut, Department of Economics.
  • Handle: RePEc:uct:uconnp:2020-20
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. How Important Is Health Inequality for Lifetime Earnings Inequality?
      by Christian Zimmermann in NEP-DGE blog on 2021-01-07 18:34:35

    Citations

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    Cited by:

    1. Michael Keane & Elena Capatina & Shiko Maruyama, 2019. "Health Shocks and the Evolution of Earnings over the Life-Cycle," Discussion Papers 2018-14a, School of Economics, The University of New South Wales.
    2. Diego Daruich & Raquel Fernández, 2020. "Universal Basic Income: A Dynamic Assessment," NBER Working Papers 27351, National Bureau of Economic Research, Inc.
    3. Ranasinghe, Ashantha & Su, Xuejuan, 2021. "When Social Assistance Meets Market Power: A Mixed Duopoly View of Health Insurance in the United States," Working Papers 2021-1, University of Alberta, Department of Economics.
    4. Tianxu Chen, 2019. "Can Health Savings Account Reduce Health Spending?: Evidence from China," Working papers 2019-08, University of Connecticut, Department of Economics.
    5. FUKAI Taiyo & ICHIMURA Hidehiko & KITAO Sagiri & MIKOSHIBA Minamo, 2021. "Medical Expenditures over the Life Cycle: Persistent Risks and Insurance," Discussion papers 21073, Research Institute of Economy, Trade and Industry (RIETI).

    More about this item

    Keywords

    earnings; health; frailty; inequality; disability; dynamic panel estimation; life-cycle models;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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