We provide empirical evidence that negative health shocks reduce earnings. The effect is primarily driven by the participation margin and is concentrated in less educated and poor health individuals. We build a lifecycle model that is consistent with these findings. Working age individuals in the model face health and unemployment shocks and choose whether or not to participate in the labor market or exit and apply for social security disability insurance (SSDI). The probability of getting SSDI benefits depends on both an individual's health status and the number of times they've applied. We use the model to quantify the impact of health inequality on lifetime earnings inequality in the U.S. and to study the role of the SSDI program in shaping the participation distribution of older Americans.

Kai Zhao is currently Associate Professor (Tenure) at Department of Economics, University of Connecticut. Previously, he has taught at University of Western Ontario. He has also served as a Fed visiting economist. He received his master degree at Dalhousie University in Canada and completed his PhD studies in Economics at University of Western Ontario in 2011. His main research areas include macroeconomics, fiscal policy and China's macroeconomics. He has published more than 10 papers in top international journals such as Journal of Monetary Economics, International Economic Review, Review of Economic Dynamics, and European Economic Review.