Family Labor Supply Responses to Severe Health Shocks

Abstract

This paper provides new evidence on how household labor supply responds to fatal and severe non-fatal health shocks in the short- and medium-run. To identify the causal effects of these shock realizations, we leverage administrative data on families' health and labor market outcomes, and construct counterfactuals to affected households by using households that experience the same shock but a few years in the future. We find that fatal health shocks lead to an immediate increase in the surviving spouses' labor supply and that this effect is entirely driven by families who experience significant income losses. Accordingly, widows, who face large income losses when their husbands die, increase their labor force participation by more than 11%; while widowers, who are significantly more financially stable, slightly decrease their labor supply. Notably, however, the patterns of sensitivity to comparable income changes are similar across genders. In contrast to fatal shocks, we find that non-fatal health shocks—in particular, heart attacks or strokes—have no meaningful effects on spousal labor supply, consistent with the adequate insurance coverage for the associated foregone income. Overall, the results point to self-insurance as a driving mechanism for the family labor supply responses that we estimate. Combined with a stylized model, our findings suggest efficient ways to target government transfers through existing social insurance programs.