The Relationship between Health and Labour Force Participation: Evidence from a Panel Data Simultaneous Equation Model

Melbourne Institute Working Paper No. 1/07

36 Pages Posted: 23 Jun 2007

See all articles by Lixin Cai

Lixin Cai

University of Melbourne - Melbourne Institute: Applied Economic & Social Research

Date Written: March 2007

Abstract

A concern when estimating the effect of health on labour supply is that health might be endogenous, and in particular that people might use poor health to justify non-participation. This would result in the effect of health being overestimated if health were treated as exogenous. The paper employs a simultaneous equation model to explore the relationship between health and labour force status, allowing for the endogeneity of health. In addition, the paper takes advantage of panel data to control for unobserved heterogeneity so that more efficient estimation results can be obtained than using cross-sectional data. The results confirm the finding in the literature that health has a positive and significant effect on labour force participation for both males and females. As for the reverse effect, it is found that labour force participation has a negative effect on male health but a positive effect on female health, implying that the justification hypothesis is rejected for males but not for females. The exogeneity hypothesis on the health variable is rejected for both samples based on a joint test.

Keywords: Health status, labour force participation, simultaneous equation model, panel data

JEL Classification: C15, C35, I21, J14, J21

Suggested Citation

Cai, Lixin, The Relationship between Health and Labour Force Participation: Evidence from a Panel Data Simultaneous Equation Model (March 2007). Melbourne Institute Working Paper No. 1/07, Available at SSRN: https://ssrn.com/abstract=995971 or http://dx.doi.org/10.2139/ssrn.995971

Lixin Cai (Contact Author)

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

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