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Discrete Heterogeneity in the Impact of Health Shocks on Labour Market Outcomes

  • Stefanie Schurer

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

Empirical evidence from the psychology literature suggests that reactions towards health shocks depend strongly on the personality trait of locus of control, which is usually unobservable to the analyst. In this paper, the role of this discrete heterogeneity in shaping the effects of health shocks on labour supply are theoretically modelled by adopting the Grossman (1972) model. Using German longitudinal data, the predictions of the theoretical model are tested with a latent class binary choice model and an alternative identification strategy. A robust result across both specifications for various definitions of locus of control, health shocks and labour market outcomes is that internals have a smaller probability of leaving the labour market after experiencing a health shock than externals.

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Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2008n19.

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Length: 43 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:iae:iaewps:wp2008n19
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Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia

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