Health Shocks, Health Insurance, Human Capital, and the Dynamics of Earnings and Health

Elena Capatina and Michael P. Keane

No 80, Opportunity and Inclusive Growth Institute Working Papers from Federal Reserve Bank of Minneapolis

Abstract: We specify and calibrate a life-cycle model of labor supply and savings incorporating health shocks and medical treatment decisions. Our model features endogenous wage formation via human capital accumulation, employer-sponsored health insurance, and means-tested social insurance. We use the model to study the effects of health shocks on health, labor supply and earnings, and to assess how health shocks contribute to earnings inequality. We also simulate provision of public insurance to agents who lack employer-sponsored insurance. The public insurance program substantially increases medical usage by the uninsured, leading to improved health and life expectancy, which generates higher Social Security costs. But the program also creates positive labor supply incentives, and substantially reduces costs of social insurance, Medicaid and free care. On balance the net program cost is modest, and all agents in the model are ex ante better off in a balanced budget simulation. In contrast, improving access to Medicaid has perverse labor supply effects, does little to improve health, and makes almost all agents worse off in a balanced budget scenario.

Keywords: Income risk; Health insurance; Welfare; Health; Earnings inequality; Human capital; Precautionary saving; Health shocks (search for similar items in EconPapers)
JEL-codes: D91 E21 I14 I31 (search for similar items in EconPapers)
Date: 2023-11-15
New Economics Papers: this item is included in nep-dge and nep-hea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Health shocks, health insurance, human capital, and the dynamics of earnings and health (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmoi:97509

DOI: 10.21034/iwp.80

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