The Impact of Health on Wages : Evidence from Europe Before and During the Great Recession

This paper adds to the empirical literature of health as a potential endogenous explanatory variable in wage equations by addressing problems such as unobserved heterogeneity, sample selection and measurement error (in the health variable) in one comprehensive framework. Moreover, by using European individual-level panel data from before and during the Great Recession (GR) — which started in Europe in 2008 — we gain insights into whether and how the current crisis has altered the relationship between health and wages. Our results provide empirical evidence of measurement error in the self-reported health variable when estimating its impact on wages for men, and of selectivity bias in wages for both men and women. We also show that in the period prior to the GR, working-age men (20-64 years old) who are in relatively better health (measured by a one-unit increase in a health index) have, on average, a 9 percent higher hourly wage rate. This effect is concentrated (and largest) among older workers (50-64 years old). Instead, during the GR the positive impact of health on wages disappears. One possible explanation for these findings is that presenteeism (i.e. attending work even though being sick) — which has become more common during the GR — may have reduced the impact of (poor) health on wages. With regard to working-age women (20-59 years old), we do not find evidence of an effect of health on wages, both before and during the GR