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Income and Employment Effects of Health Shocks -A Test Case for the German Welfare StateRegina T. Riphahn The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent, nonprofit limited liability company (Gesellschaft mit beschrÀnkter Haftung) supported by the Deutsche Post AG. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. The current research program deals with (1) mobility and flexibility of labor markets, (2) internationalization of labor markets and European integration, (3) the welfare state and labor markets, (4) labor markets in transition, (5) the future of work, and (6) general labor economics.
D I S C U S S I O N P A P E R S E R I E SIZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. Using data from the first eleven waves of the German Socio-Economic Panel this study investigates the dynamic effects of health shocks on employment and economic wellbeing of older workers. A health shock trebles the probability of leaving the labor force and almost doubles the unemployment risk. The financial effects of health shocks are small on average and those individuals with the highest remaining earnings potential are least affected by the health shock. Welfare state instruments support the poorest section of the population but do not succeed in neutralizing the effects of a health shock for these groups.JEL Classification: I10, J21, J28, J26