The demand for health, alcohol abuse, and labor market outcomes: a longitudinal study

Shao-Hsun Keng

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Becker and Murphy (1988) presented a rational addiction theory to rationalize the behavior of addiction. This dissertation extends rational addiction theory to examine the hypothesis of rational addiction and the long-term impact of addiction on labor productivity and labor supply. The theoretical model explicitly considers investment in health, drug consumption, and labor supply as joint decision variables, and treats wage as the outcome of these decisions. A simultaneous framework is empirically estimated to test the forward-looking hypothesis and the government policies are evaluated by simulation. The data set is the National Longitudinal Survey of Youth Cohort (1979--1994);The results show that there is a trade off between the demand for health and the occasions of binge drinking. Youths reduce their occasions of binge drinking when they increase the demand for health, and vice versa. The finding supports the forward-looking hypothesis and that heavy drinking is addictive. Furthermore, we found a statistically weak effect of the alcohol price on the demand for binge drinking, and the long run alcohol price elasticity of the probability of heavy drinking, binge drinking, and no binge drinking are relatively small, -0.24, 0.03, and 0.21, respectively. The short run price elasticities are -0.09, 0.01, and 0.08, respectively. The results suggest that the demand for binge drinking is not price responsive in the short run or long run;Continued binge drinking results in lower wage and health profiles, whereas it does not have significant impact on hours worked. Policy simulations show that increasing alcohol price by 100% decreases the occasions of binge drinking by only 5%, but raising the minimum legal drinking age one year reduces the occasions of binge drinking among underage youths by about 5%. The effect of increasing the alcohol price and the minimum drinking age on health status, hours worked, and log wage are positive, however, their magnitudes are small. Our results suggest that policy makers should focuses on affecting the age at which young people start drinking and taxing alcohol is a relatively inefficient policy for achieving this.

Date: 1998-01-01
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