The Dynamics of the Smoking Wage Penalty

Michael E. Darden, Julie L. Hotchkiss, and M. Melinda Pitts
Working Paper 2020-11
July 2020

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Abstract: Cigarette smokers earn significantly less than nonsmokers, but the magnitude of the smoking wage gap and the pathways by which it originates are unclear. Proposed mechanisms often focus on spot differences in employee productivity or employer preferences, neglecting the dynamic nature of human capital development and addiction. In this paper, we formulate a dynamic model of young workers as they transition from schooling to the labor market, a period in which the lifetime trajectory of wages is being developed. We estimate the model with data from the National Longitudinal Survey of Youth, 1997 Cohort, and we simulate the model under counterfactual scenarios that isolate the contemporaneous effects of smoking from dynamic differences in human capital accumulation and occupational selection. Results from our preferred model, which accounts for unobserved heterogeneity in the joint determination of smoking, human capital, labor supply, and wages, suggest that continued heavy smoking in young adulthood results in a wage penalty at age 30 of 14.8 percent and 9.3 percent for women and men, respectively. These differences are less than half of the raw mean difference in wages at age 30. We show that the contemporaneous effect of heavy smoking net of any life-cycle effects explains roughly 67 percent of the female smoking wage gap but only 11 percent of the male smoking wage gap.

JEL classification: I10, I12

Key words: wages, smoking; dynamic system of equations link

The views expressed here are those of 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. The authors thank Tom Mroz, Melinda Morrill, John Cawley, Michael Pesko, and seminar participants at the Federal Reserve Bank of Atlanta and the Southeastern Micro Labor Workshop for helpful comments. They also thank Patrick Henson for excellent research assistance.

Please address questions regarding content to Michael Darden, Carey Business School, Johns Hopkins University, 100 International Drive, Baltimore, MD 21202; Julie Hotchkiss, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470; or Melinda Pitts, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470.

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