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The importance of the measure of health in empirical estimates of the labor supply of older men
Economics Letters North-Holland
375
16 (1984) 375-380
THE IMPORTANCE OF THE MEASURE OF HEALTH IN EMPIRICAL ESTIMATES OF THE LABOR SUPPLY OF OLDER MEN Kathryn
H. ANDERSON
Vmderhilt
Uniuersity, NashutIle. TN 37235, USA
Received
6 February
and Richard
V. BURKHAUSER
1984
When a more objective measure of health is used, economic variables previously masked by self-reported health measures are found to significantly affect work effort of older men. This may explain differences in results of previous studies even when the same empirical specifications are used.
The importance of economic variables in the labor force participation decisions of older men is an unsettled issue. The labor force participation rate of older men has substantially fallen over the last two decades and the causes of this decline have been the subject of much empirical analysis. The answer to this puzzle is particularly relevant to policymakers, since it would allow them to estimate the effect of changes in social security and other government programs on applications for benefits and on work effort. If we believe Parsons (1980) workers are very sensitive to increases in social security benefits and changes in wages, while if we believe Haveman and Wolfe (1984) they are not. One major difference between the Nutional Longitudinal Survey data used by Parsons and the Michigan Panel Study of Income Dynamics used by Haveman and Wolfe is that the former contains actual mortality experience while the latter does not. Parsons’ measure of health is an index based on future mortality; Haveman and Wolfe measure health using self-reported information. It is likely that much of the puzzle regarding the contradictory results of these two studies is based on their different health measures. Our data 0165-1765/X4/$3.00
;c) 1984, Elsevier Science Publishers
B.V. (North-Holland)
from the Retirement History Survey, a ten-year longitudinal study (196991979) of men who were aged 58-63 in 1969, allows us to investigate this possibility. In table 1, we first estimate a univariate logistic equation with labor force participation in 1969 as the dependent variable and self-reported health - health limits the kind or amount of work or housework one can do ~ as one of the independent variables. We then repeat the same specification using subsequent mortality experience whether the person is dead 10 years later - as our measure of health. The results are revealing. The two equations are significantly different from each other; we reject the null hypothesis, H,: R/3 = r, where /I is a vector of all coefficients and R a matrix of restrictions. In both. health is
Table 1 Logistic results of a labor parentheses.) Independent
force participation
model (iv = 4,878). (Standard
Parameter
variables
values
Constant
1.241 (0.219)
0.309 (0.199)
Wage
0.074 (0.159)
0.364 ’ (0.146)
Social security and pension wealth (divided by 10.000)
0.012 J (0.004)
0.966 ’ (0.376)
Housing wealth (divided by 10,000)
- 0.264 (0.194)
0.102 (0.186)
Race ( = 1, if non-white)
- 0.037 (0.070)
- 0.034 (0.063)
Age
-0.152 rl (0.014)
~0.156 * (0.013)
0.179 il (0.081)
0.198 d (0.074)
0.034 B (0.016)
0.032 a (0.015)
Marital
status ( = 1, if married)
Children
- 1.137 d (0.045)
Self-reported health ( = 1, if health limits work) Mortality measure of health ( = 1, if dead by 1979) * Significant
at the 1 percent
- 0.257 * (0.041) level.
errors
are in
significant and reduces labor force participation. But, more importantly to our point, when self-reported health is used as the measure of health, the current wage rate is not significant in the labor force participation decision. This surprising finding is reversed when future mortality is used as the measure of health. ’ In our second equation, wages are significant and are positively related to work. Somewhat surprisingly, we find that combined social security and pension wealth (the present discounted value of all future benefits) is also positively related to labor force participation. ’ Elsewhere [Anderson and Burkhauser (1983)] we argue that a more theoretically appropriate model would allow work and health to be jointly determined rather than assume health to be exogenous to the work decision. Using a bivariate specification where health and work effort are jointly determined, we find evidence of a significant interaction between these two variables. We also find that the choice of health measure (mortality versus self-reported health) importantly affects the wage variable. To us, the major unsettled issue in the empirical literature on the labor supply of older workers is the appropriateness of the instrument used to measure health. As a first step in resolving this question, we estimate a trivariate logistic model of labor supply, mortality, and self-reported health in which all are hypothesized to be jointly determined. As can be seen in table 2, holding labor supply and mortality constant, we find that wage and housing wealth are the only variables which significantly affect self-reported health. It is especially noteworthy that age is not significant. Since one would suspect that poor health is related to age, we interpret this as evidence that self-reported health is a poor indicator of actual ’ While this finding is surprising, it is the same puzzling result found by many retirement studies using Retirement Hrstory Survey data. See, for instance. Quinn (1977). Boskin and Hurd (1978) and Burtless and Moffitt (1982). Only when self-reported health is used as one of the independent variables in a wage equation - a specification we have trouble with not only because self-reported health is a questionable proxy for actual health but also because it is unobservable to a firm making a wage offer - is this estimated wage variable found to significantly affect work in some retirement studies using Retirement History Suroey data [see Gordon and Blinder (1980) Gustman and Steinmeier (1981)]. * This finding is consistent with other empirical studies in the literature. Greenburg and Kosters (1977) argue that people with a taste for work are likely to have accumulated wealth (including retirement benefits) and are likely to retire later than others. A more fully specified retirement model would separate the wealth effect from the change in wealth effect caused by continuing in the labor force for another period. See Burkhauser and Quinn (1983).
378
K. if. Ademon,
Table 2 Trivariate
R. V. Burkhnuwr
/ Inyxmme
of hwlth
logistic results of the model (N = 4.878). (Standard
Independent
variables
Labor force participation
a
nwo.sure
errors are in parentheses.)
Mortality of health
measure
Self-reported health
-0.107 (0.147)
0.972 a (0.159)
0.086 (0.157)
-0.136 (0.109)
- 0.570 i1 (0.116)
0.116” (0.040)
0 006 (0.029)
0.040 (0.030)
- 0.023 (0.020)
- 0.030 * (0.014)
- 0.074 i) (0.016)
Race
- 0.063 (0.069)
- 0.001 (0.052)
- 0.057 (0.055)
Age
- 0.148 d (0.014)
Constant
0.657 (0.214)
Wage
Social security and pension
Housing
Marital
wealth
wealth
status
Children
-0.188 d (0.060)
- 0.053 (0.065)
0.035 B (0.016)
-0.018 h (0.010)
- 0.005 (0.010)
- 0.033 (0.022)
- 0.561 ’ (0.023)
Self-reported
a Significant b Significant
- 0.561 ’ (0.023)
health
Ln of likelihood
0.184 a (0.017)
8466
function
at the 1 percent at the 5 percent
0.184’ (0.017)
- 0.033 (0.022)
measure of health
0.015 (0.011)
0.172’ (0.080)
Labor force participation
Mortality
0.054 1l (0.010)
level. level.
health once future mortality is held constant. Our result suggests that unless the appropriate measure of health is used, labor force participation studies will continue to yield a wide range of empirical results even when the same specifications are used.
Appendix
These data are from the Retirement females, farmers, and the self-employed. seriously ill - operationally, the bedridden
History Survey. We exclude as well as those who were and the housebound.
Wuge. The hourly wage is created an estimated earnings function. The wage is assumed to be determined by human capital characteristics observable to firms: education, occupation, and demographic characteristics. In the wage equation, age is the firm’s indicator of individual health. Neither self-reported nor actual mortality experience is appropriate in determining the firm’s wage offer, since they are unobservable. See Anderson and Burkhauser (1983) for a fuller discussion of this variable. Social security and pension wealth. This data comes from Burkhauser and Quinn (1983). It is the present discounted value of all social security and person benefits which these workers expect to receive. See Anderson and Burkhauser (1983) for the instrumental variable equations used to assign their values in this sample. Housing weulth. This value is the net value of the house in 1969. Race. This value equals one for non-whites. Age. This value ranges from 58 to 63. Marital status. This value equals one if married. Children. This value equals number of children 18 and under in the household. Self-reported health. This value equals one if a worker reports that his health limits the kind or amount of work or housework he can do. Mortality measure of health. This value equals one if the worker died between 1969 and 1979. In our sample 28 percent died during this period. Labor force participation. This value equals one if the subject was working in 1969. For a fuller discussion of these variables see Anderson and Burkhauser (1983).
and how they were measured,
References Anderson, Kathryn H. and Richard V. Burkhauser, 1983, A jointly determined retirement decision model: The interaction of health and work choices, Working paper no. 83-WOS, revised (Vanderbilt University, Nashville, TN).
Boskin, Michael J. and Michael D. Hurd. 1978, The effect of social security on early retirement, Journal of Public Economics 10. Burkhauser, Richard V. and Joseph F. Quinn. 1983, Is mandatory retirement overrated? Evidence from the 1970s Journal of Human Resources 18, no. 3. 3377358. Burtless, Gary and Robert A. Moffitt, 1982, The effect of social security on labor supply of the aged: The joint choice of retirement data and post-retirement hours of work. Econometrics Society Meetings. Gordon, Roger H. and Alan S. Blinder, 1980. Market wages, reservation wages and retirement, Journal of Public Economics 14, 277-308. Greenburg, David and Marvin Kosters, 1977. Income guarantees and the working poor: The effect of income maintenance on the hours of work of male family heads, in: Glen Cain and Harold Watts, eds., Income maintenance and labor supply (Markham, Chicago. IL). Gustman, Alan L. and Thomas L. Steinmeier. 1981. Partial retirement and the analysis of retirement behavior, Working paper no. 763 (National Bureau of Economic Research, Washington, DC). Haveman. Robert H. and Barbara L. Wolfe, 1984. The decline in male labor force participation: comment, Journal of Political Economy. forthcoming. Parsons, Donald 0.. 1980, The decline in male labor force participation, Journal of Political Economy 88, no. 1, 117-134. Quinn, Joseph F., 1977, Microeconomic determinants of early retirement: A cross-sectional view of white married men, Journal of Human Resources 12, no. 3, 329-346.
375
16 (1984) 375-380
THE IMPORTANCE OF THE MEASURE OF HEALTH IN EMPIRICAL ESTIMATES OF THE LABOR SUPPLY OF OLDER MEN Kathryn
H. ANDERSON
Vmderhilt
Uniuersity, NashutIle. TN 37235, USA
Received
6 February
and Richard
V. BURKHAUSER
1984
When a more objective measure of health is used, economic variables previously masked by self-reported health measures are found to significantly affect work effort of older men. This may explain differences in results of previous studies even when the same empirical specifications are used.
The importance of economic variables in the labor force participation decisions of older men is an unsettled issue. The labor force participation rate of older men has substantially fallen over the last two decades and the causes of this decline have been the subject of much empirical analysis. The answer to this puzzle is particularly relevant to policymakers, since it would allow them to estimate the effect of changes in social security and other government programs on applications for benefits and on work effort. If we believe Parsons (1980) workers are very sensitive to increases in social security benefits and changes in wages, while if we believe Haveman and Wolfe (1984) they are not. One major difference between the Nutional Longitudinal Survey data used by Parsons and the Michigan Panel Study of Income Dynamics used by Haveman and Wolfe is that the former contains actual mortality experience while the latter does not. Parsons’ measure of health is an index based on future mortality; Haveman and Wolfe measure health using self-reported information. It is likely that much of the puzzle regarding the contradictory results of these two studies is based on their different health measures. Our data 0165-1765/X4/$3.00
;c) 1984, Elsevier Science Publishers
B.V. (North-Holland)
from the Retirement History Survey, a ten-year longitudinal study (196991979) of men who were aged 58-63 in 1969, allows us to investigate this possibility. In table 1, we first estimate a univariate logistic equation with labor force participation in 1969 as the dependent variable and self-reported health - health limits the kind or amount of work or housework one can do ~ as one of the independent variables. We then repeat the same specification using subsequent mortality experience whether the person is dead 10 years later - as our measure of health. The results are revealing. The two equations are significantly different from each other; we reject the null hypothesis, H,: R/3 = r, where /I is a vector of all coefficients and R a matrix of restrictions. In both. health is
Table 1 Logistic results of a labor parentheses.) Independent
force participation
model (iv = 4,878). (Standard
Parameter
variables
values
Constant
1.241 (0.219)
0.309 (0.199)
Wage
0.074 (0.159)
0.364 ’ (0.146)
Social security and pension wealth (divided by 10.000)
0.012 J (0.004)
0.966 ’ (0.376)
Housing wealth (divided by 10,000)
- 0.264 (0.194)
0.102 (0.186)
Race ( = 1, if non-white)
- 0.037 (0.070)
- 0.034 (0.063)
Age
-0.152 rl (0.014)
~0.156 * (0.013)
0.179 il (0.081)
0.198 d (0.074)
0.034 B (0.016)
0.032 a (0.015)
Marital
status ( = 1, if married)
Children
- 1.137 d (0.045)
Self-reported health ( = 1, if health limits work) Mortality measure of health ( = 1, if dead by 1979) * Significant
at the 1 percent
- 0.257 * (0.041) level.
errors
are in
significant and reduces labor force participation. But, more importantly to our point, when self-reported health is used as the measure of health, the current wage rate is not significant in the labor force participation decision. This surprising finding is reversed when future mortality is used as the measure of health. ’ In our second equation, wages are significant and are positively related to work. Somewhat surprisingly, we find that combined social security and pension wealth (the present discounted value of all future benefits) is also positively related to labor force participation. ’ Elsewhere [Anderson and Burkhauser (1983)] we argue that a more theoretically appropriate model would allow work and health to be jointly determined rather than assume health to be exogenous to the work decision. Using a bivariate specification where health and work effort are jointly determined, we find evidence of a significant interaction between these two variables. We also find that the choice of health measure (mortality versus self-reported health) importantly affects the wage variable. To us, the major unsettled issue in the empirical literature on the labor supply of older workers is the appropriateness of the instrument used to measure health. As a first step in resolving this question, we estimate a trivariate logistic model of labor supply, mortality, and self-reported health in which all are hypothesized to be jointly determined. As can be seen in table 2, holding labor supply and mortality constant, we find that wage and housing wealth are the only variables which significantly affect self-reported health. It is especially noteworthy that age is not significant. Since one would suspect that poor health is related to age, we interpret this as evidence that self-reported health is a poor indicator of actual ’ While this finding is surprising, it is the same puzzling result found by many retirement studies using Retirement Hrstory Survey data. See, for instance. Quinn (1977). Boskin and Hurd (1978) and Burtless and Moffitt (1982). Only when self-reported health is used as one of the independent variables in a wage equation - a specification we have trouble with not only because self-reported health is a questionable proxy for actual health but also because it is unobservable to a firm making a wage offer - is this estimated wage variable found to significantly affect work in some retirement studies using Retirement History Suroey data [see Gordon and Blinder (1980) Gustman and Steinmeier (1981)]. * This finding is consistent with other empirical studies in the literature. Greenburg and Kosters (1977) argue that people with a taste for work are likely to have accumulated wealth (including retirement benefits) and are likely to retire later than others. A more fully specified retirement model would separate the wealth effect from the change in wealth effect caused by continuing in the labor force for another period. See Burkhauser and Quinn (1983).
378
K. if. Ademon,
Table 2 Trivariate
R. V. Burkhnuwr
/ Inyxmme
of hwlth
logistic results of the model (N = 4.878). (Standard
Independent
variables
Labor force participation
a
nwo.sure
errors are in parentheses.)
Mortality of health
measure
Self-reported health
-0.107 (0.147)
0.972 a (0.159)
0.086 (0.157)
-0.136 (0.109)
- 0.570 i1 (0.116)
0.116” (0.040)
0 006 (0.029)
0.040 (0.030)
- 0.023 (0.020)
- 0.030 * (0.014)
- 0.074 i) (0.016)
Race
- 0.063 (0.069)
- 0.001 (0.052)
- 0.057 (0.055)
Age
- 0.148 d (0.014)
Constant
0.657 (0.214)
Wage
Social security and pension
Housing
Marital
wealth
wealth
status
Children
-0.188 d (0.060)
- 0.053 (0.065)
0.035 B (0.016)
-0.018 h (0.010)
- 0.005 (0.010)
- 0.033 (0.022)
- 0.561 ’ (0.023)
Self-reported
a Significant b Significant
- 0.561 ’ (0.023)
health
Ln of likelihood
0.184 a (0.017)
8466
function
at the 1 percent at the 5 percent
0.184’ (0.017)
- 0.033 (0.022)
measure of health
0.015 (0.011)
0.172’ (0.080)
Labor force participation
Mortality
0.054 1l (0.010)
level. level.
health once future mortality is held constant. Our result suggests that unless the appropriate measure of health is used, labor force participation studies will continue to yield a wide range of empirical results even when the same specifications are used.
Appendix
These data are from the Retirement females, farmers, and the self-employed. seriously ill - operationally, the bedridden
History Survey. We exclude as well as those who were and the housebound.
Wuge. The hourly wage is created an estimated earnings function. The wage is assumed to be determined by human capital characteristics observable to firms: education, occupation, and demographic characteristics. In the wage equation, age is the firm’s indicator of individual health. Neither self-reported nor actual mortality experience is appropriate in determining the firm’s wage offer, since they are unobservable. See Anderson and Burkhauser (1983) for a fuller discussion of this variable. Social security and pension wealth. This data comes from Burkhauser and Quinn (1983). It is the present discounted value of all social security and person benefits which these workers expect to receive. See Anderson and Burkhauser (1983) for the instrumental variable equations used to assign their values in this sample. Housing weulth. This value is the net value of the house in 1969. Race. This value equals one for non-whites. Age. This value ranges from 58 to 63. Marital status. This value equals one if married. Children. This value equals number of children 18 and under in the household. Self-reported health. This value equals one if a worker reports that his health limits the kind or amount of work or housework he can do. Mortality measure of health. This value equals one if the worker died between 1969 and 1979. In our sample 28 percent died during this period. Labor force participation. This value equals one if the subject was working in 1969. For a fuller discussion of these variables see Anderson and Burkhauser (1983).
and how they were measured,
References Anderson, Kathryn H. and Richard V. Burkhauser, 1983, A jointly determined retirement decision model: The interaction of health and work choices, Working paper no. 83-WOS, revised (Vanderbilt University, Nashville, TN).
Boskin, Michael J. and Michael D. Hurd. 1978, The effect of social security on early retirement, Journal of Public Economics 10. Burkhauser, Richard V. and Joseph F. Quinn. 1983, Is mandatory retirement overrated? Evidence from the 1970s Journal of Human Resources 18, no. 3. 3377358. Burtless, Gary and Robert A. Moffitt, 1982, The effect of social security on labor supply of the aged: The joint choice of retirement data and post-retirement hours of work. Econometrics Society Meetings. Gordon, Roger H. and Alan S. Blinder, 1980. Market wages, reservation wages and retirement, Journal of Public Economics 14, 277-308. Greenburg, David and Marvin Kosters, 1977. Income guarantees and the working poor: The effect of income maintenance on the hours of work of male family heads, in: Glen Cain and Harold Watts, eds., Income maintenance and labor supply (Markham, Chicago. IL). Gustman, Alan L. and Thomas L. Steinmeier. 1981. Partial retirement and the analysis of retirement behavior, Working paper no. 763 (National Bureau of Economic Research, Washington, DC). Haveman. Robert H. and Barbara L. Wolfe, 1984. The decline in male labor force participation: comment, Journal of Political Economy. forthcoming. Parsons, Donald 0.. 1980, The decline in male labor force participation, Journal of Political Economy 88, no. 1, 117-134. Quinn, Joseph F., 1977, Microeconomic determinants of early retirement: A cross-sectional view of white married men, Journal of Human Resources 12, no. 3, 329-346.