It is well known that smoking leads to lower wages. However, the mechanism of this negative relationship is not well understood. This analysis includes a decomposition of the wage gap between smokers and nonsmokers, with a variety of definitions of smoking status designed to reflect differences in smoking intensity. This paper finds that nearly two-thirds of the 24 percent selectivity-corrected smoking/nonsmoking wage differential derives from differences in characteristics between smokers and nonsmokers. These results suggest that it is not differences in productivity that drive the smoking wage gap. Rather, it is differences in the endowments smokers bring to the market along with unmeasured factors, such as baseline employer tolerance. In addition, we also determine that even one cigarette per day is enough to trigger the smoking wage gap and that this gap does not vary by smoking intensity.
JEL classification: J31, I19, C31
Key words: smoking wage penalty, wage decomposition, wage differentials
The authors thank Brian Armour, Erik Nessom, and participants at the Federal Reserve Micro System Conference for helpful comments. The authors also thank Andrew Balthrop and Fernando Rios-Avila for excellent research assistance. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
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