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

Michael Keane (), Elena Capatina and Shiko Maruyama

No 2018-14b, 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 of labor supply and savings that incorporates health and health shocks. Our model features endogenous wage formation via human capital accumulation, employer sponsored health insurance, and meanstested social insurance. We find a substantial part of the impact of health shocks on earnings arises via reduced human capital accumulation. Health shocks account for 15% of lifetime earnings inequality for U.S. males, with two-thirds of this due to behavioral responses. In particular, it is optimal for low-skill workers – who often lack employer sponsored insurance – to curtail labor supply to maintain eligibility for means-tested transfers that protect them from high health care costs. This causes low-skill workers to invest less in human capital. Provision of public health insurance can alleviate this problem and enhance labor supply and human capital accumulation.

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: 63 pages
Date: 2020-06
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 (4)

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Working Paper: Health Shocks and the Evolution of Earnings over the Life-Cycle (2019)
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