Bouncing back from health shocks: Locus of control and labor supply

- I test whether control beliefs buffer labor-supply responses to episodes of ill health using German panel data.
- Men with negative versus men with positive control beliefs are 100% more likely to drop out of the labor market a year after the health shock.
- A series of robustness checks shuts off alternative explanations for heterogeneous responses.
- The buffering effects are most beneficial to men from disadvantaged backgrounds.
- Long-term labor market and health benefits of control beliefs are likely to be large.

Many studies have demonstrated a causal effect of ill health on labor-supply. In this study, I explore the personality-related heterogeneity - measured by differences in control beliefs - in the labor-supply response to health shocks. To identify such behavioral differences, I follow the labor-supply trajectories of 649 initially full-time employed and healthy men who experience at some point in time an episode of ill health. When compared with men who have positive control beliefs, men with negative control beliefs are on average 100% more likely to drop out of the labor force - a drop out unrelated to early retirement - and work on average 12% less hours per week the year after the health shock. These behavioral differences remain robust to alternative estimation samples and health-shock definitions. They are strongest for men from low socioeconomic backgrounds, who do not have access to private health insurance, or who experience high intensity shocks. Heterogeneous labor-supply responses are also observed for conscientiousness and risk tolerance, traits that have been linked with willingness to invest and treatment compliance. An important conclusion from the findings is that a small set of non-cognitive skills produces long term labor-market benefits in the advent of adversity.