The Role of Health Insurance in Spousal Labor Supply Responses to a Health Shock

A major health shock has the potential to affect the labor supply decisions not only of those who experience the shock but also of their family members. People who experience a health shock often experience difficulty working and incur large medical expenses, both of which can impact the family budget. They may also require additional help with daily activities. Thus, spouses face a tradeoff between time spent earning income for the family and providing care for their partner. Complicating this decision is health insurance, which can ease medical financial burdens, but may keep spouses locked to their current jobs if their family health insurance is employer-provided. Our paper explores the impact of a health shock on spousal labor supply decisions and the role of health insurance in making these decisions. The health shocks we focus on are heart attacks, cancer, strokes, and the onset of a disability for individuals whose spouse is younger than age 65.

We use an event study approach in which we compare the labor supply decisions of households before and after the health shock, treating the timing of the health shock as exogenous. We use data from the Panel Study of Income Dynamics from 2003 onwards, which contains information on families where at least one spouse is observed to have experienced a health shock. We conduct the event study separately for households with different sources of insurance in order to examine whether the impact of a health shock on labor supply and caregiving decisions differs by having access to health insurance. Finally, we consider the effect of Medicaid expansions on labor supply and caregiving decisions by comparing households that live in states where Medicaid is expanded to cover childless adults to states that have not expanded Medicaid for this population. Our findings have important implications for the health care system because spousal labor supply responses to a health shock affect a family’s reliance on informal caregiving versus formal care.