If you could magically grant every American the same health profile, how much would income inequality shrink? According to a study by Terry researcher Roozbeh Hosseini, the answer is about one-third.
By the time workers reach age 55, 28% of the gap in their lifetime earnings can be traced to the unpredictable and unequal burden of health problems.
“How Important Is Health Inequality for Lifetime Earnings Inequality?”, which Hosseini, an associate professor in the John Munro Godfrey, Sr. Department of Economics, co-authored with Karen Kopecky from Emory University and Kai Zhao with the University of Connecticut, was published earlier this year in The Review of Economic Studies.
While previous papers examined health and income inequality, they used blunt measures such as self-reported health ratings. Hosseini’s team’s paper borrowed a measure from geriatrics research called the frailty index to provide a more granular description of individuals’ health.
“There are several issues with self-reporting,” Hosseini says. “It’s very subjective. If you ask a 65-year-old to describe their health, they have a different reference than a 20-year-old. … The frailty index gets around some of these issues because it’s constructed based on some objective indicators.”
Looking at 28 granular factors contributing to “poor health” — from diabetes to arthritis to vision impairment — the researchers developed a more objective and precise measure of health. It also allowed Hosseini’s team to glue two large national data sources from the University of Michigan: the Panel Study of Income Dynamics and Health and Retirement Study.
“One of the things the frailty index does is it allows that comparison,” Hosseini says. “It’s based on the count of the number of these health deficits that happen to people. It’s a certain number of things, and this makes it comparable across data sets.”
Using multipoint scales spanning the entire lifecycle, the authors found that each health deficit or “health shock” experienced at any point over the lifetime reduces a worker’s expected earnings by 3.9%.
Each health shock reduced the worker’s probability of employment by 1.6 to 1.9 percentage points. Those who remained employed after a health shock saw a 2% reduction in hourly wages compared to their healthier colleagues.
Hosseini’s team found that sicker people — those with higher frailty index scores — see their lifetime incomes driven down by earlier mortality and shorter careers and because people who have a harder time physically working choose to opt out of work more often.
But the largest two drivers of income loss are split between younger and older earners.
For workers under 45, the more health shocks they accumulate, the less efficient they are in the workplace. Over time, their hourly wage lags below that of healthier colleagues. However, for workers over 55, leaving the labor force to access Social Security Disability Insurance (SSDI) is a main cause of wage losses.
It’s no surprise that people with more health shocks are more likely to apply for SSDI because they are, by definition, in poor health. But unless their health problems are catastrophic, applying for benefits can be a long process.
Applicants earning less than $1,690 a month may drop out of the labor force and miss months or years of paychecks waiting to be approved.
“Only about half of this reduction in lifetime earning inequality comes from differences in productivity and reduced wages, but the other half comes from the incentive that bad health generates for applying for Social Security and disability or quitting work and trying to apply for SSDI,” Hosseini says.
In short, in trying to ensure people did not take advantage of SSDI, the government created a condition where people who can work part-time or in some capacity quit all employment because they are too sick to make ends meet without disability insurance.
Disability insurance itself is necessary, but the system needs to improve, Hosseini says.
You could ameliorate the problem by basing SSDI decisions solely on medical history instead of lack of work, he says. In Great Britain, where disability payments are decided solely by medical conditions, workers can continue to supplement their disability payments with work they can do despite their health limitations, he added.
Working with the frailty index allowed Hosseini and his co-authors to closely examine health disparities and answer several questions. They are working on another paper that determines when health inequality starts to affect individuals.
“It looks like most of the differences in health status measured by frailty are set very early on, which means parents have some impact on it. Education has some impact on it,” Hosseini says. “We’re basically studying the joint determination of education and health across generations. We want to study the intergenerational linkage between earnings and to what extent health affects earnings and vice versa.”