The impacts of health shocks on household labor supply and domestic production

Abstract

This paper investigates the impact of severe health shocks on labor supply decisions and domestic production within German households. We draw from the German Socio-Economic Panel (SOEP), focusing on individuals aged 25 to 55 at the time of their first observed health shock. After the health shock, we find that affected individuals suffer a persistent loss in annual gross labor income of around 4,000 euros. This effect results mostly from adjustments at the extensive margin, with labor market participation declining by about 16%. We observe a reduction in full-time employment, but no significant effect on part-time employment. At the household level, a combination of public transfers and added worker effect effectively compensates for the income loss. Finally, individuals experiencing a health shock, particularly women, spend more time on domestic production.