How do labor market and health outcomes interact over the life cycle in a country characterized by a large informal sector and strong inequalities? To quantify the effects of bad health on labor market trajectories, wealth, and consumption, we develop a life-cycle heterogeneous agents model with a formal and an informal sector. We estimate our model using data from the National Income Dynamics Study, the first nationally representative panel study in South Africa. We run counterfactual experiments and show that health shocks have an important impact on wealth and consumption. The channel through which these shocks propagate strongly depends on the job status of individuals at the time of the shock. For formal workers, bad health reduces labor efficiency, which translates into lower earnings. For informal workers and the non-employed, the shock lowers the job finding rate and in-creases job separation into nonemployment, which results in a surge in non-employment spells. As bad health spells persist more for nonemployed than for employed individuals, the interaction between labor market risks and health risks generates a vicious circle.
In the US, almost half of unemployment spells end through recall. In this paper, we show that the probability of being recalled is much higher among unemployment benefit recipients than nonrecipients. We argue that a large part of the observed difference in recall shares is accounted for by the design of the unemployment insurance financing scheme characterized by an experience rating system. We develop a search and matching model with different unemployment insurance status, endogenous separations, recalls and new hires. We quantify what would have been the labor market under alternative financing scheme. In the absence of the experience rating, the hiring and separations would have been higher in the long run and more volatile. Experience rating system contributes significantly to the difference in recalls between the recipients and the nonrecipients.
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