What Do Wages Add to the Health-Employment Nexus? Evidence from Older European Workers

Abstract

The role of wages in the health-employment nexus can be important for designing employment policies aimed at older workers with health limitations. We, therefore, estimate the direct effect of health on employment and hours worked and its indirect effect that is mediated through wages using individual-level panel data from SHARE. The endogeneity of self-reported health is controlled for by instrumenting it with severe health conditions in a correlated random effects model. For men, we find that the direct effects of health deterioration, as measured by a reduction in health from the 75th to the 50th percentile of the health distribution, are about a 20% point lower employment probability and about 171 fewer hours worked per year. The indirect health effects through wages work in the opposite directions as health positively affects wages and wages negatively affect employment and hours worked. The total effects of this health deterioration amount to a 12% point lower employment probability and 95 fewer hours worked per year. In particular our finding of a large direct health effect on employment suggests an instrumental role for policy aimed at accommodating workers with health limitations to keep them employed at older ages.