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The Dynamic Effects of Health on the Employment of Older Workers

Author

Listed:
  • Richard Blundell

    (Institute for Fiscal Studies)

  • Jack Britton

    (Institute for Fiscal Studies)

  • Monica Costa Dias

    (Institute for Fiscal Studies)

  • Eric French

    (Institute for Fiscal Studies)

Abstract
Using data from the Health and Retirement Study (HRS) and the English Longitudinal Study of Ageing (ELSA), we estimate a dynamic model of health and employment. We estimate how transitory and persistent health shocks affect employment over time. In a first step we formulate and estimate a dynamic model of health. The procedure accounts for measurement error and the possibility that people might justify their employment status by reporting bad health. We find that health is well represented by the sum of a transitory white noise process and a persistent AR(1) process. Next, we use the method of simulated moments to estimate the employment response to these shocks. We find that persistent shocks have much bigger effects on employment than transitory shocks, and that these persistent shocks are long lived. For this reason employment is strongly correlated with lagged health, a fact that the usual cross sectional estimates do not account for. We also show that accounting for the dynamics of health and employment leads to larger estimates of the effect of health on employment than what simple OLS estimates of health on employment would imply. We argue that the dynamic effect of health on employment could be generated by a model with human capital accumulation, where negative health shocks slowly reduce the human capital stock, and thus gradually causes people to exit the labor market.

Suggested Citation

  • Richard Blundell & Jack Britton & Monica Costa Dias & Eric French, 2016. "The Dynamic Effects of Health on the Employment of Older Workers," Working Papers wp348, University of Michigan, Michigan Retirement Research Center.
    • Handle: RePEc:mrr:papers:wp348
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    File URL: http://mrdrc.isr.umich.edu/publications/Papers/pdf/wp348.pdf
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    References listed on IDEAS

    as
    1. Bound, John & Stinebrickner, Todd & Waidmann, Timothy, 2010. "Health, economic resources and the work decisions of older men," Journal of Econometrics, Elsevier, vol. 156(1), pages 106-129, May.
    2. McFadden, Daniel, 1989. "A Method of Simulated Moments for Estimation of Discrete Response Models without Numerical Integration," Econometrica, Econometric Society, vol. 57(5), pages 995-1026, September.
    3. Arie Kapteyn & James P. Smith & Arthur van Soest, 2007. "Vignettes and Self-Reports of Work Disability in the United States and the Netherlands," American Economic Review, American Economic Association, vol. 97(1), pages 461-473, March.
    4. Disney, Richard & Emmerson, Carl & Wakefield, Matthew, 2006. "Ill health and retirement in Britain: A panel data-based analysis," Journal of Health Economics, Elsevier, vol. 25(4), pages 621-649, July.
    5. Piggott, John & Woodland, Alan (ed.), 2016. "Handbook of the Economics of Population Aging," Handbook of the Economics of Population Aging, Elsevier, edition 1, volume 1, number 1.
    6. Butler, J S, et al, 1987. "Measurement Error in Self-reported Health Variables," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 644-650, November.
    7. Pakes, Ariel & Pollard, David, 1989. "Simulation and the Asymptotics of Optimization Estimators," Econometrica, Econometric Society, vol. 57(5), pages 1027-1057, September.
    8. Blundell, R. & French, E. & Tetlow, G., 2016. "Retirement Incentives and Labor Supply," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 457-566, Elsevier.
    9. John Bound, 1991. "Self-Reported Versus Objective Measures of Health in Retirement Models," Journal of Human Resources, University of Wisconsin Press, vol. 26(1), pages 106-138.
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    Citations

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    Cited by:

    1. Svetlana Pashchenko & Ponpoje (Poe) Porapakkarm & Mariacristina De Nardi, 2017. "The Lifetime Costs of Bad Health," 2017 Meeting Papers 533, Society for Economic Dynamics.
    2. Roozbei Hosseini & Karen Kopecky & Kai Zhao, 2022. "The Evolution of Health over the Life Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 237-263, July.
    3. Michael Keane & Elena Capatina & Shiko Maruyama, 2019. "Health Shocks and the Evolution of Earnings over the Life-Cycle," Discussion Papers 2018-14a, School of Economics, The University of New South Wales.
    4. Pamela Giustinelli & Matthew D. Shapiro, 2024. "SeaTE: Subjective Ex Ante Treatment Effect of Health on Retirement," American Economic Journal: Applied Economics, American Economic Association, vol. 16(2), pages 278-317, April.
    5. Chiara Dal Bianco, 2023. "Disability Insurance and the Effects of Return-to-work Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 351-373, July.
    6. Roozbei Hosseini & Karen Kopecky & Kai Zhao, 2022. "The Evolution of Health over the Life Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 237-263, July.
    7. Jack Britton & Eric French, 2020. "Health and Employment amongst Older Workers," Fiscal Studies, John Wiley & Sons, vol. 41(1), pages 221-250, March.
    8. Tavares, Aida Isabel, 2021. "Working more and less hours, profiling old European workers during first wave of COVID-19 pandemic, evidence from SHARE data," MPRA Paper 111263, University Library of Munich, Germany.

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