Household Responses to Individual Shocks: Disability and Labour Supply

We study how changes in health status affect the labor supply and consumption choices of individuals and couples. We find evidence of non-cooperative behavior in couples and quantify its implications for marital insurance.

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Abstract. How do people respond to idiosyncratic shocks? Using longitudinal data from the Canadian Survey of Labour and Income Dynamics we use variation in health status to develop and estimate a life cycle framework which rationalizes observed responses of individuals and couples to disability shocks. Two puzzling findings associated with disability onset motivate our work: (1) the almost complete absence of added worker e effects within households and, (2) the fact that single workers’ labor supply responses to disability shocks are larger and more persistent than those of married workers. We argue that these facts are consistent with optimal life cycle behavior when we account for the interaction of two mechanisms: first, a dynamic human capital accumulation motive linking wages to labor supply; second, the ability of spouses to transfer time through home production. We provide evidence supporting the empirical relevance of both these mechanisms and show that dynamic labor supply decisions depend crucially on the interaction of the two. Our findings suggest that the persistence of measured wage shocks may be in part a by-product of optimal individual responses.

Citation

@article{gallipoli2009household,
  title={Household Responses to Individual Shocks: Disability and Labour Supply},
  author={Gallipoli, Giovanni and Turner, Laura},
  year={2009}
}