On the Role of Health in Climbing the Income Ladder: Evidence from China
This paper uses two large panel data sets in China to study the effects of a health shock on household income mobility from 1991 to 2016. We compare outcomes of households with a member who receives a health shock with comparable households that do not receive any health shocks. To do so, we match on demographic and worker characteristics of household members. At the aggregated level, a health shock lowers the probability of “getting out of the low-income trap” by 8.4 percentage points. At the household level, a health shock lowers household income per capita by 13.1% and income position by 3.9 percentiles. We show that the reduced labor supply at the extensive margin and decrease in labor productivity, measured in hourly wage, explain the majority of households’ income loss. Households who become poor due to a health shock continue to exhibit lower income mobility after three years.