Health and Unemployment During a Negative Labor Demand Shock

The association between unemployment and health is well documented, but causality remains unclear. This paper investigates how pre‐existing health conditions amplify the effects of adverse labor market shocks. Using variation in local unemployment generated by a shock in the petroleum prices that hit the geographic center of the petroleum industry in Norway, but left other regions more or less unaffected, our study reveals that workers with compromised health face a higher likelihood of unemployment during downturns. Heterogeneity analysis reveals differences in susceptibility based on gender, age, education, and job type. Females exhibit greater sensitivity to health, and the youngest age group is most affected. Furthermore, higher education and white‐collar jobs correlate with amplified health‐related unemployment effects. Conversely, poor health in combination with high age, low education, and blue‐collar jobs increases the uptake of social insurance during the economic downturn, pointing toward the substitutability between unemployment benefits and health‐related benefits.