How Important Is Health Inequality for Lifetime Earnings Inequality?

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