Skip to main content

Understanding the health and labour relationship

Final Report Summary - HEALTHWORK (Understanding the health and labour relationship)

A large body of evidence shows that health and labour are positively related, and that indeed ill health seems to be negatively related with all the labour outcomes, i.e. wages, earnings, labour force participation, hours worked, retirement, job turnover and benefit packages. Studies have traditionally focused on older workers and retirement transitions. Several studies focus on individuals older than 50 and show that decreases in health status have explanatory power for retirement decisions. Earlier results showed that a health deterioration increase the probability of unemployment by 84% and the probability of dropping out of the labour force by 200% for individuals aged 40 to 59 in Germany.

Other results showed that for individuals older than 50 there is a 15% decrease in the probability of working after the onset of a chronic illness and, although this effect diminishes over time, it remains substantially high at nearly 4% five years after the onset. There is much less literature describing the associations between health and labour market outcomes among middle-aged individuals. The existing studies, however, seem to agree that there is a stronger relationship between health and employment than between health and wages. In addition, individuals with impaired health have a lower probability of leaving unemployment, and higher probability of transiting into economic inactivity.

On the other hand, the fellow analysed the role of mental and physical health on exits out of and entries into employment and while physical health is an important determinant of both transitions, in her results mental health is mostly associated with transitions out of employment. Using administrative Danish information covering a 10% of the total population a study showed that the employment rate of injured men on a road accident decreases sharply around 10% after the accident and it does not recover the level of the comparable group after 6 years. Moreover, although on aggregate terms the decrease in earnings on the men sample seems to be compensated with an increase in public transfers, thus leaving disposable income unaffected, injured men with low disposable income before the accident have a significantly lower income after the accident than non-injured comparable persons.

The existence of long-run effects of an accident on labour outcomes is confirmed using British data. That study shows that having an accident does not have a direct effect on employment if the individual’s health status remains unchanged, but accidents causally increase the probability of the onset of a disability by 172% in the short-run, and some effects are also observed in the long-run. In addition, they that study found that the onset of a disability at age 25 reduces the probability of employment at age 40 by 14.4 percentage points. Similar results are reported for Germany using self-reported information on the assessed degree of disability. The fellow examined in a previous project how health deterioration affects the probability of continuing working and the transition to different states for the Spanish population. She showed that workers in good-health that suffer a health deterioration are around 5% less likely to remain in employment and 3.5% more likely to become inactive.

The fellow also extended the analysis to other European countries (Belgium, Denmark, Ireland, Italy, Greece, Netherlands, Portugal and Spain) and she showed that having a health shock decreases the probability of employment in all countries but France, Italy and Greece, and the largest effects are found in Ireland, Denmark and the Netherlands. The probability of becoming inactive is correspondingly higher after a health shock, and in Denmark and the Netherlands individuals also transit into unemployment. She argues that some of the differences across countries can be attributed to differences in social security arrangements. Therefore, the evidence shows that a health deterioration worsens the labour outcomes of young, middle aged and old workers and that the effects do not vanish with time. The evidence shows that workers after a health deterioration, mainly transit from employment to economic inactivity, from where the outflow back to employment is close to zero (OECD, 2003). Cross-national comparisons suggest that the institutional setting, such as the specifics of the DI and UI program, are important for this. The literature also points out that different health components (physical vs. mental) explain differently the individual labour transitions.

This project aimed to expand the existing evidence on several fronts.

In the first stage it dealt in depth with the relative role that mental and physical health play in explaining labour status transitions. Competing risk models were applied to the available European datasets with detailed health information (SHARE, BHPS, GSOEP and LISS) to take into account the transitions across the different possible states (employment, unemployment, disability and retirement). The project subsequently further incorporated the individual’s attachment to work, as it has proved in the psychological literature to be an important driving factor in explaining effort to be in work.

This research question is policy relevant given the observed increased in the claimants of disability benefits associated to mental health problems (OECD, 2008). In a second stage, this project aims to improve our understanding of why the labour behaviour after a health deterioration varies across individuals in terms of leaving from or re-entering into the labour market. The focus of this project will be on the role played by both occupational characteristics and financial incentives and will exploit a particularly rich and new data source that links the Dutch Population Survey on Living Conditions with hospital admission records and income tax registers in the Netherlands for the period 1998 to 2005.

The large sample size makes it possible to explore the heterogeneity of effects across different groups. In addition, the disability system arrangements in the Netherlands during the observational period provide the required exogenous variation to identify some of the effects of interest.

This projects aims at answering two well posed and policy relevant questions:

1. What is the relative role of mental and physical health in explaining the different labour market transitions?
2. What is the role played by occupational characteristics and financial incentives in explaining the individual labour market behaviour after the onset of a health deterioration?