Estimating the Stochastic Sickness Effect on Employment, Worktime and Saving Decisions

Abstract

This paper aims to study labor supply and saving decisions as a result of health uncertainty. O’Donnell (1995) suggested a theoretical positive relationship between working hours (or saving rate) and the perceived health uncertainty. That is, for risk-averse individuals, there exists a precaution motion to work harder and save more when facing the uncertainty for the health condition. We test this hypothetical relationship by applying the 2003-2005 data from the Panel Study of Family Dynamics (PSFD) in Taiwan. Following Hughes and Maguire’s approach (2003), our estimation result indicates that a stochastic sickness has positive effects on the decisions of working time and saving rate.Health, Uncertainty, Labor Supply, Saving