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

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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.

Suggested Citation

  • Elena Capatina & Michael P. Keane, 2023. "Health Shocks, Health Insurance, Human Capital, and the Dynamics of Earnings and Health," Opportunity and Inclusive Growth Institute Working Papers 080, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmoi:97509
    DOI: 10.21034/iwp.80
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    References listed on IDEAS

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    1. Daniel Aaronson & Eric French, 2004. "The Effect of Part-Time Work on Wages: Evidence from the Social Security Rules," Journal of Labor Economics, University of Chicago Press, vol. 22(2), pages 329-352, April.
    2. Keane, Michael & Moffitt, Robert, 1998. "A Structural Model of Multiple Welfare Program Participation and Labor Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 553-589, August.
    3. Roozbeh Hosseini & Kai Zhao & Karen Kopecky, 2018. "How Important Is Health Inequality for Lifetime Earnings Inequality?," 2018 Meeting Papers 1093, Society for Economic Dynamics.
    4. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1995. "Precautionary Saving and Social Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 360-399, April.
    5. Naoki Aizawa & Hanming Fang, 2020. "Equilibrium Labor Market Search and Health Insurance Reform," Journal of Political Economy, University of Chicago Press, vol. 128(11), pages 4258-4336.
    6. Jérôme Adda & James Banks & Hans-Martin von Gaudecker, 2009. "The Impact of Income Shocks on Health: Evidence from Cohort Data," Journal of the European Economic Association, MIT Press, vol. 7(6), pages 1361-1399, December.
    7. Michael G. Palumbo, 1999. "Uncertain Medical Expenses and Precautionary Saving Near the End of the Life Cycle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(2), pages 395-421.
    8. Keane, Michael P & Wolpin, Kenneth I, 2001. "The Effect of Parental Transfers and Borrowing Constraints on Educational Attainment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1051-1103, November.
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    Cited by:

    1. Elena Capatina & Hyunjae Kang, 2024. "Demand for Spousal Health," ANU Working Papers in Economics and Econometrics 2024-695, Australian National University, College of Business and Economics, School of Economics.

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    More about this item

    Keywords

    Income risk; Health insurance; Welfare; Health; Earnings inequality; Human capital; Precautionary saving; Health shocks;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • I14 - Health, Education, and Welfare - - Health - - - Health and Inequality

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