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The Impact of Health on Labor Supply Near Retirement

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Abstract

Estimates of effect of health on employment differ from study to study due to differences in methods, data, institutional background and health measure. We assess the importance of these differences, using a unified framework to interpret and contrast estimate for the US and England. We find that subjective and objective health measures, and subjective measures instrumented by objective measures produce similar estimates but only if a sufficiently large number of objective measures is used. Otherwise, objective measures produce downward biased estimates. Failure to account for initial conditions produces upward biased estimates. We find that a single subjective health index yields similar estimates to multiple measures. Overall, declines in health explain up to 15% of the decline in employment between ages 50 and 70. The effects drop with education and are larger in the US than in England. Cognition has little added explanatory power once we control for health.

Key Findings

  • We find that objective and subjective health measures deliver similar estimates if a sufficiently large set of objective measures is used. Controlling for only a limited number of health conditions, however, may significantly reduce the estimated impact of health on employment.
  • We find that a single health index, while sometimes rejected from a statistical standpoint, produces estimates of health’s effect on employment that are similar to those obtained using multiple health indexes. Using objective measures to instrument for subjective measures also produces similar, although slightly larger estimates.
  • We find that properly accounting for heterogeneity in background characteristics by controlling for initial conditions is a more important modeling issue than the choice of the health measure.
  • Although cognition is significantly related to employment, we find that it has little added explanatory power once we also control for health.

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Project

Paper ID

WP 2017-364

Publication Type

Working Paper

Publication Year

2017