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

Abstract

We study the contribution of health shocks to earnings inequality and uncertainty in labour market outcomes. We calibrate a life-cycle model with idiosyncratic health, earnings, employment and survival risk, where individuals make labour supply and savings decisions, adding two novel features. First, we model health as a complex multi-dimensional 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 labour 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 labour supply.

Paper by:

Elena Capatina, Michael Keane and Shiko Maruyama

About the presenter’s visit

Dr Elena Capatina will be visiting the School of Economics on Wednesday 4 March 2020.  While here, she will be using room 520A Colin Clark Building.  If you would like to meet with her please contact Dr Jorge Miranda Pinto who will be her host while at The University of Queensland.  Dr Jorge Miranda Pinto can be contacted on j.mirandapinto@uq.edu.au.