Life-cycle effects of health risk

Health status affects individuals' labor supply, asset accumulation and welfare through four main channels: productivity, medical expenditures, time endowments and survival probabilities. Using a life-cycle model calibrated to the U.S. for different education groups, I evaluate the relative importance of each channel and quantify their interactions. The productivity and time endowment channels dominate in importance and the risks implied by them contribute significantly to income inequality and precautionary savings. Health effects are larger for the non-college than college educated and account to a large extent for the lower labor supply and higher reliance on government transfers of the non-college group.