Health Inequality, Labor Supply and Retirement Policies

The paper presented in this ZEW Research Seminar studies the dynamic, two-way interaction between health and labor market outcomes at older ages. The interactions between health and labor market outcomes are especially meaningful around retirement age, when health deterioration speeds up. These interactions go in two directions: health problems reduce productivity and labor supply, but working may also directly affect health. These two-way effects may be heterogeneous and particularly relevant for workers who are already in poor health. The author develops and estimates a dynamic model of labor supply, health, and savings for women. The model allows for feedback effects of working on health, and for these to depend on the worker’s health status and education. To estimate the model, she exploits a reform that raised women’s age of eligibility for state pensions in the United Kingdom. She finds that working negatively affects health, more so for low educated women already in poor health. Labor supply responses to health shocks and earnings shocks are substantial, particularly for low educated women in poor health. The author uses this framework to evaluate a policy that raises the retirement age of women. The effects of raising the retirement age are heterogeneous across the health distribution and widen inequality in health. Low educated women in poor health bear greater costs from the reform. These women cannot afford to retire in the absence of retirement benefits, but working for them is more costly and damages their already poor health.