Why Americans spend so much on health: they work themselves sick

If you compare Americans to Europeans, you can come up with a few differences: they are richer, work more, pay less in taxes, spend a lot more on health, but are less healthy. Could all these facts somehow be related?

Yes, according to Hui He and Kevin Huang, who use a dynamic general equilibrium model to study the impact of labor income taxes on the labor supply and health outcomes. The resulting story they can tell follows essentially these lines: First, to be more likely to be healthy, you need a good amount of leisure, or not be overworked (which may explain why I have been sick the last few days). But if labor income tax is low, you tend to want to work more. This diminishes your health, which you compensate by buying more health services, which you can afford thanks to higher income. Due to high demand for these services, they also become more expensive. In the end, Americans end up with an outcome where they have more stuff to consume which they trade off with paying more for health services, enjoying lower health and less leisure. All this because of the labor income taxes. Whether they are better off is a matter of individual taste. I could certainly need a bit more leisure about now.