Gordon G. Liu, Franklin Qian, Xiang Zhang
This paper uses the two largest panel data sets in China to study the effects of a health shock on household income mobility. At the aggregate level, we document that households that experience a health shock exhibit much lower transition probability and upward mobility,compared with households that do not. The probability of “getting out of the low-income trap,”the probability of a low-income household ending up in a position above the 20th percentile in the national income distribution, is 4.4 percentage points lower for the treated households. At the micro level, we exploit an event study approach and find that a health shock lowers household income per capita by 12.8%, and income position by 3.2 percentiles, relative to the control group. Further, we analyze household labor supply responses when a health shock happens. We do not find evidence suggesting that households adjust their labor supply at the extensive or intensive margin. Instead, labor productivity, measured as the hourly wage, decreases substantially for individuals who have experienced a health shock. Finally, we track the income mobility of households up to four years after the health shock. We find that poor households that experienced a health shock continue to exhibit lower income e mobility in this period.
JEL Classifications: D31, H0, I10
Keywords: Income mobility, health shock, low-income trap, China.