Medical Progress as a Driver of (Unequal) Life Cycle Outcomes

Michael Kuhn , Vienna Institute of Demography
Miguel Sanchez-Romero, Vienna Institute of Demography

Motivated by the fact that within-cohort inequality in wealth and in life expectancy increase over the life cycle, we propose a normative framework for studying how heterogeneous individuals, who differ by ability and initial health conditions, accumulate human capital, assets, social security wealth, and health deficits over the life cycle. To do so, we implement a life cycle model in which individuals face mortality risk and optimally decide about their education, consumption, their labor supply (intensive and extensive margins), and on their health care expenditure, which is used to reduce the speed of accumulation of health deficits and hence their risk of dying. Based on a calibration for the US, we study how productivity growth and medical progress bear on the life-cycle behaviors and outcomes of set of birth cohorts ranging between 1910 and 1970. We identify a key role for medical progress in driving increases in health care spending and life expectancy as well as for the expansion of education and the reversal from an initial tendency towards earlier retirement to a postponement. We also find that both productivity growth and medical progress contribute considerably to growing inequality.

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 Presented in Session P3. Poster Session Migration, Economics, Environment, Methods, History and Policy