Labor market institutions and risk coping mechanisms are fundamental topics to understand developing countries’ economies. This paper lies in the intersection of the two. I test the role of labor contracts as an insurance mechanism against idiosyncratic productivity shocks, particularly illnesses. In addition, I introduce the idea and show evidence that this characteristic of contracts amplifies the gender wage gap in Mexico. From an implicit contract model with occupational choice, I predict that i) the probability of getting ill, but not illness, negatively affects hourly earnings in an optimal contractual arrangement, ii) workers with better access to ex-post mechanisms to smooth consumption are less likely to choose the contract market, and iii) employers in the contract market internalize the additional responsibilities of women at home reducing their wages in relation to men. Using the Mexican Family Life Survey, I find consistent evidence that, on average, wage workers are in a contract market that provides them insurance against illness shocks. This institution interacted with the fact that women, but not men, miss days at work when other members of the family get sick, is responsible for reducing women wages in the order of 6% to 7%. Applying the same analysis to selfemployed workers, a group for which this type of insurance is not possible, correctly rejects the contract market equilibrium.