The Influence of Early-life Economic Shocks on Long-term Outcomes: Evidence from the U.S. Great Depression

Abstract

A large body of research has shown that early-life environments can affect individuals’ socioeconomic success, commonly known as the fetal origins hypothesis (Barker 1990, Almond and Currie, 2011; Almond, Currie, and Duque 2018). Less is known, however, about the extent to which initial environments influence the health trajectories of individuals at advanced stages over the life-course. Uncovering the causal link between fetal origins and aging is informative from both a theoretical and a policy perspective. From the perspective of the theory of skill formation (e.g., Cunha and Heckman 2007), understanding the persistence of shocks at different stages over the life course provides insights about: i) the shape of the production function; and ii), the interaction between early-life shocks and future investments. Could an initial shock set an individual in a particular health trajectory that determines a chain of future investments until old age? If so, this would provide new insights into the mechanisms through which health and human capital are determined over the life-course. Second, from a policy perspective, estimating the long-reach of early-life influences may help identify potential remediating opportunities for social interventions.

By focusing on the most severe and prolonged economic downturn in American history—the Great Depression-, this paper contributes to the literature by providing novel evidence on the long-term impacts of in-utero economic shocks on individuals’ physical health, psychological well-being, and wealth after age 50. We use restricted geocoded-data from the Health and Retirement Study combined with rich temporal-and-geographic variation in labor-market conditions throughout the 1930s.

The focus on the Great Depression is twofold. First, while the Crash has received enormous attention from economic historians and macroeconomists, most of these studies have focused on its macroeconomic aspects [Fisher (1933), Bernanke (1983, 2000)]. Surprisingly few studies directly evaluate the micro-level and long-reach implications for families and children who lived through the shock—possibly because of a lack of micro-data spanning the entire life-course. Second, the economic fluctuations during the 1930s provide a unique opportunity to learn about the link between economic deprivation in critical stages of human capital formation and well-being at later stages. One of the most pressing long-run fiscal issues that developed countries face, is population aging (Gruber and Wise 2002); thus, understanding the interplay between social environments and initial endowments in shaping outcomes at later stages is informative for policies aimed at raising long-term productivity and reducing healthcare costs.

We employ a difference-in-differences strategy in which we compare the outcomes of individuals aged 50-65, born in 1930-40 in different states, and who were exposed at birth to either the collapse of the economy or the subsequent recovery. Our results show that affected cohorts experienced substantial declines in physical health and psychological well-being six decades later such as a higher incidence of metabolic syndrome, depression, and difficulties in activities of daily living. Results vary substantially across groups: while women were more likely to experience depression or diabetes, men faced reductions in self-reported health status and lower education. Blacks also experienced greater deterioration in their health than Whites.