Causation Between Health and Income: A Need to Panic

This article tests whether health has improved income or income has improved health in OECD countries over the last 50 years. A theoretical framework for both directions of causation is first outlined. A panel time-series approach is then taken and, unlike similar work, common shocks across countries (‘cross-sectional dependence’) are taken into account in the analysis using the PANIC (Panel Analysis of Non-stationarity in Idiosyncratic and Common components) approach of Bai and Ng. It is found that better health improves income more generally while income in turn also affects health. This finding is shown to be robust to dynamic specification.