How Important Is Health Inequality for Lifetime Earnings Inequality?

By Roozbeh Hosseini, Karen A. Kopecky and Kai Zhao

Using a dynamic panel approach, we provide empirical evidence that negative health shocks reduce earnings. The effect is primarily driven by the participation margin and is concentrated in less educated and poor health individuals. We build a dynamic, general equilibrium, lifecycle model that is consistent with these findings. In the model, individuals, whose health is risky and heterogeneous, choose to either work, or not work and apply for social security disability insurance (SSDI). Health impacts individuals’ productivity, SSDI access, disutility from work, mortality, and medical expenses. Calibrating the model to the United States, we find that health inequality is an important source of lifetime earnings inequality: nearly 29 percent of the variation in lifetime earnings at age 65 is due to the fact that Americans face risky and heterogeneous life-cycle health profiles. A decomposition exercise reveals that the primary reason why individuals in the United States in poor health have low lifetime earnings is because they have a high probability of obtaining SSDI benefits. In other words, the SSDI program is an important contributor to lifetime earnings inequality. Despite this, we show that it is ex ante welfare improving and, if anything, should be expanded.

Interesting paper with a potentially puzzling conclusion. SSDI increases inequality because its existence allows people to stop working when disabled, thus they have lower income (though one could ask if their income could have decreased further without SSDI). But SSDI is good because it provide insurances against having to work while disabled, i.e., a non-monetary component to welfare. Income is not everything.

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