Out for Good: Labor Market Effects of Transitory and Persistent Health Shocks
50 Pages Posted: 22 Mar 2022 Last revised: 17 Apr 2023
Date Written: April 12, 2023
We introduce a novel method of deriving health shock indicators based on measures directly capturing reduced working capacity due to bad health: sick days and hospitalizations. We derive two shock indicators using k-means clustering to address shock heterogeneity. While based on the intensity of the shock, the two shock indicators are best described as transitory and persistent, as we find large differences in post-shock dynamics. An event study shows that persistent shocks induce large and permanent negative employment effects, which impact household net incomes. Transitory shocks induce temporary, minor employment effects with adjustments on the margin of hours worked, which leave household net incomes unaffected.
Keywords: labor supply, health shocks, event study, k-means clustering
JEL Classification: I10, J22, H51
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