Is it all relative? The health impacts of changes to absolute and relative income

Despite policies designed to foster redistribution, the concentration of income among top earners has increased in most developed economies, as has inequality within and across communities. Aside from the well-documented repercussions of these trends on social cohesion and productivity, evidence suggests that changes in the income distribution might have an impact on individuals’ physical and mental well-being. Indeed, recent work has pointed to the feeling of falling behind as a potential driver for the rise in morbidity and in mortality among certain groups of the population, for whom absolute levels of income have not necessarily declined. Disentangling the health effects of changes to people’s relative economic situation from changes to their absolute level of income is however complex. First, both absolute and relative levels of income are likely endogenous inputs in the health production function. Second, disentangling the health impacts of changes in one’s relative income level from those of a change in his or her absolute level of income is not straightforward. Indeed, changes in individuals’ income levels often simultaneously affect their rank or position within the income distribution. In this paper, we propose an empirical setting and approach to address these challenges. Using four years of Canadian hospital records linked with individual-level census data, we deal with the potential reverse causality characterizing the relationship between health and income by exploiting movements in the price of oil and their differential impact on individuals’ earnings based on their industry of work. We also take advantage of the importance and geographic concentration of the extractive industry in Canada, where changes in the price of oil can influence the shape of local income distributions in many ways, depending on the distribution of workers across industries. Based on individuals’ own labour market activity and on the industrial composition of their neighbourhood, we thus exploit the different combinations of changes to absolute and relative income resulting from changes in the price of oil to investigate how each might individually affect health outcomes and health care. Overall, our findings shed light on the mechanisms through which changes in people’s relative income trajectories may contribute to the development of severe health conditions, and to episodes such as drugs- or alcohol-related hospitalizations, associated with deaths of despair.