Health Shocks and the Evolution of Earnings over the Life-Cycle

Michael Keane (), Elena Capatina and Shiko Maruyama

No 2018-14a, Discussion Papers from School of Economics, The University of New South Wales

Abstract: We study the contribution of health shocks to earnings inequality and uncertainty in labor market outcomes. We calibrate a life-cycle model with idiosyncratic health, earnings, employment and survival risk, where individuals make labor supply and savings decisions, adding two novel features. First, we model health as a complex multidimensional concept. We differentiate between functional health and latent health risk, and between temporary/persistent and predictable/unpredictable health shocks. Second, we model interactions between health and human capital accumulation. We find that, in an environment with both costly health shocks and means-tested transfers, low-skill workers find it optimal to reduce their labor supply in order to maintain eligibility for transfers that protect them from potentially high health care costs. Thus, means-tested transfers generate a moral hazard effect that causes agents (especially those with low productivity) to invest less in human capital. Provision of public insurance can alleviate this problem and enhance labor supply.

Keywords: Health; Health Shocks; Human Capital; Income Risk; Precautionary Saving; Earnings Inequality; Health Insurance; Welfare (search for similar items in EconPapers)
JEL-codes: D91 E21 I14 I31 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2019-12
New Economics Papers: this item is included in nep-dge, nep-hea, nep-ias and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Health Shocks and the Evolution of Earnings over the Life-Cycle (2020)
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