Health channel explains 14% of employment variance

Researchers document that economic contractions lead to a causal worsening of health among working-age adults.

Conversely, poor health is a predictor of negative labor market outcomes.

This two-way feedback mechanism, termed the 'health channel,' reveals a significant interplay between macroeconomic activity and individual well-being.

For instance, a contractionary 1 percentage point monetary policy shock increases the fraction of workers with bad health by 0.25 percentage points.

Furthermore, an unexpected 1 percentage point increase in bad health depresses employment by about 0.5 percentage points for several years.

The study highlights that health deterioration during the Global Financial Crisis (GFC) explains roughly one-eighth of that episode's 4 percentage point employment decline.

To quantify the health channel's magnitude, the authors developed a dynamic general equilibrium model with incomplete markets, where agents differ in health, labor productivity, and wealth.

The model incorporates stochastic health transitions and endogenous labor supply.

Worse health imposes four costs: lower labor productivity, medical expenditures, time costs for health investments, and increased disutility from labor.

The study's novel Wold-Enabled Dynamic General Equilibrium (WEDGE) estimation strategy identifies shock correlations, pinning down the health channel.

It finds that the health channel accounts for 14 percent of employment variance over the business cycle and 11 percent of the employment decline during the GFC.

Productivity effects and time costs of health are the primary drivers, with medical spending playing a minor role.