Health, Health Insurance and the Labor Market

". . . that the labor force status of an individual will be affected by his health is an unassailable proposition [because] a priori reasoning and casual observation tell us it must be so, not because there is a mass of supporting evidence." (Bowen and Finegan, 1969) "Despite the near universal finding that health is a significant determinant of work effort, the second major inference drawn from [this] review is that the magnitude of measured health effects varies substantially across studies." (Chirikos, 1993) This chapter provides an overview of some of the literature linking health and labor market behavior. The question is important because for groups as diverse as single mothers and older people, health is thought to be a major determinant of wages, hours, and labor force participation. Thus, an understanding of the effects of health on labor market activity is necessary for evaluations of the cost effectiveness of interventions designed to prevent or cure disease. Moreover, since the relationship between health and the labor market is mediated by social programs, an understanding of this relationship is necessary if we are to assess the effectiveness and solvency of these programs. In countries with aging populations, these questions will only become more pressing over time as more individuals reach the age where health has the greatest impact of labor market outcomes. The two quotations above, one from 1969 and one from 1993, illustrate that a good deal of empirical evidence linking health and labor market activity has sprung up over the last 25 years. Indeed, the literature we review suggests that health has a pervasive effect on most outcomes of interest to labor economists including wages, earnings, labor force participation, hours worked, retirement, job turnover, and benefits packages. But unfortunately there is no consensus about the magnitude of the effects or about their size relative to the effects of other variables. We will, however, be able to shed some light on factors that cause the estimates to disagree. Much of the best work linking health and labor market outcomes focuses on developing countries. This may be because the link between health and work is more obvious in societies in which many prime age adults are under-nourished and in poor health, and also because the theory of efficiency wages provides a natural starting point for investigations of this issue. However several excellent recent surveys of health and labor markets in developing countries already exist (dee Behrman and Deolalikar 1988 and Strauss and Thomas 1998). In order to break newer ground, this survey will have as its primary focus papers written since 1980 using U.S. data, although we will refer to the developing country literature where appropriate.