Academic journal article Federal Reserve Bank of Atlanta, Working Paper Series

Even One Is Too Much: The Economic Consequences of Being a Smoker

Academic journal article Federal Reserve Bank of Atlanta, Working Paper Series

Even One Is Too Much: The Economic Consequences of Being a Smoker

Article excerpt

Even One is Too Much: The Economic Consequences of Being a Smoker

I. Introduction and Background

The health consequences of smoking have been well documented (Chaloupka and Warner 2000). Cigarette smoking has been shown to decrease life expectancy and increase health care utilization and expenditures. The CDC estimates that health care expenditures attributable to smoking were over $95 billion per year in the period 2000-2004 (Adkihari et al. 2008). However, there are other costs associated with cigarette smoking besides poor health and smoking-attributable health care expenditures. This research explores the labor market costs associated with cigarette smoking, specifically the impact of cigarette smoking on wages.

There are several different mechanisms through which smoking could impact earnings. For example, it is reasonable to expect that any action that lowers a person's stock of health would have negative implications for wages, either through absenteeism (Weng et al. 2013) or lower productivity (Kristein 1983). In addition, there could also be a negative stigma associated with cigarette smoking independent of health status. Cigarette smoking could be viewed as negative in the work place due to the time cost associated with smoking breaks or simply because the employer does not tolerate cigarettes. Furthermore, individuals who smoke may have a higher rate of time preference and thus are less willing to invest in human capital (van Ours 2004).

Studies examining the relationship between smoking and wages have consistently found evidence of a negative relationship (for examples, see Levine et al 1997, Auld 1998, Lee 1999, Grafova and Stafford 2005, Braakman 2008, and Anger and Kvasnika 2010). However, when the estimation is performed separately for men and women, it appears that the wage penalty is driven by the negative effect on men's wages as no wage penalty was found for female smokers, at least in The Netherlands (van Ours 2004).

While it is generally accepted that smokers earn lower wages, the mechanism behind this wage differential is less clear. Levine et al. (1997) suggests that the lower wages for smokers is due to such issues as employer discrimination, increased costs of employing smokers, or lower productivity by smokers. In this paper, a decomposition of the wage differential between smokers and nonsmokers, across a range of criteria for smoking status, is used to gain a further understanding into the share of the wage differential that is attributed to selection into smoking, differences in endowments, and differences in the return to those endowments. A secondary goal of this research is to examine the impact of the choice of the smoking status criteria, including how to capture smoking intensity (i.e., number of cigarettes consumed as well as daily versus nondaily smoking status), as well as how to treat former smokers. Understanding the impact of smoking at different levels of intensity will aid in the interpretation of the results. For example, if the decomposition results indicate that the return to endowments decline with smoking intensity, this is suggestive of a productivity effect due to, perhaps, health issues associated with smoking or smoking breaks. If the decomposition results do not vary with smoking intensity, this is more suggestive of employer discrimination.

This analysis makes use of the Tobacco Use Supplement to the Current Population Survey over the period of 1992 to 2011. The results suggest that smoking intensity matters little in the measurement of the wage differential--just one cigarette is enough for the wage penalty to kick in. In other words, it is simply the fact that an individual smokes, not the level of cigarette consumption that matters for the determination of the smoking wage penalty. Furthermore, the mechanism behind the wage differential does not change with smoking intensity.

II. Empirical Model

An individual is characterized as having his/her wage determined in one of two sectors, the "smoking" sector (S) or the "nonsmoking" sector (NS). …

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