Does smoking really harm your earnings so much? Biases in current estimates of the smoking wage penalty

Abstract

Empirical studies on the earnings effects of tobacco use have found significant wage penalties attached to smoking. This article produces evidence that suggests that these estimates are significantly upward biased. The bias arises from a general failure in the literature to control for past smoking behaviour of individuals. Two-Stage Least Squares (2SLS) regressions show that the smoking wage penalty is reduced by as much as a third, if past smoking of individuals is controlled for.

Acknowledgements

We are grateful to Bob Hart, Andrea Ichino, David Jaeger, Carsten Trenkler and Thorsten Vogel for their helpful comments. All remaining errors are our own.

Notes

¹An exception is Lee (1999). However, the author uses only very crude earnings information (the average earnings in the occupational category of an individual). Furthermore, Levine et al. (1997) show, albeit descriptively, that workers in the USA who quit smoking between 1984 and 1991 exhibit higher wage growth than workers who did not change their smoking status in this period.

²Tests of overidentifying restrictions were carried out using the Stata ado file by Baum et al. (2003).

³Results are available from the authors upon request.