The Central Bank of Luxembourg published Cahier d’études No. 200, “When health affects income (and vice versa): Policy transmission in a heterogeneous agent life-cycle model”, analysing the observed link between wealth and life expectancy and how it shapes the transmission of health and redistribution policies. The research finds that the effect from income to health is strongest early in life through preventive investment, while later-life health differences increasingly drive income outcomes. The model represents ageing as a gradually rising “health deficit” that increases care costs, reduces productivity and wages, and raises mortality risk, but can be slowed through prevention (for example, healthy diet, sport, vaccination and screening). In simulations financed by a proportional tax on labour income, prevention subsidies that reduce the relative price of prevention improve health, productivity, wages and life expectancy for all, but do not reduce inequality, while income redistribution reduces income and health inequality yet weakens incentives for prevention, lowering overall health, mean income and life expectancy. The bank notes the views are those of the authors and do not necessarily reflect the Central Bank of Luxembourg or the Eurosystem.
Central Bank of Luxembourg 2025-09-23
Central Bank of Luxembourg publishes study on two-way health and income dynamics and the effects of redistribution and prevention subsidies
The Central Bank of Luxembourg's Cahier d’études No. 200 examines how wealth and life expectancy interact, showing income influences early-life health through preventive investments. Prevention subsidies boost health and productivity but don't reduce inequality, while income redistribution decreases inequality but may lower overall health and income. The views expressed are those of the authors, not necessarily the Central Bank of Luxembourg or the Eurosystem.