The Effect of Alcohol Use on the Wage Returns to Education

Many pundits and social scientists, including economists, have long assumed that alcohol use negatively impacts labor market outcomes. Despite the general belief that alcohol use should be associated with lower wages via a productivity mechanism, microeconomists have failed to find a consistent, negative relationship between alcohol use and wages (Cook and Moore, 2000). Rather than the expected relationship, a review of the literature suggests strong evidence of a positive relationship between non-problematic alcohol use and wages, and possibly a negative relationship between abusive alcohol use and wages although this finding has less empirical support (Cook and Moore, 2000). Given the wide-spread a priori belief that alcohol use should negatively impact productivity and therefore wages, numerous studies have attempted to explain the “drinker’s bonus” by establishing an alternative causal mechanism linking alcohol use to wages. A common alternative casual mechanism linking alcohol use to wages is human capital production (Cook and Moore, 2000; Bray, 2005). Despite attempts to quantify this causal pathway, failure to adequately address endogeneity and sample selection weaken the conclusions of prior studies. In previous work (Bray, 2005), we used the 1979 cohort of the National Longitudinal Survey of Youth (NLSY) to estimate a wage model that isolated the effects of alcohol use on wages as mediated through human capital production. Results of this work were suggestive of a possible effect of alcohol use on human capital production, but strong conclusions were not possible because the NLSY97 did not adequately measure individuals’ histories of alcohol use. This study reexamines the Bray (2005) model using the 1997 cohort of the NLSY that asks questions on alcohol use in every survey round and so offers better measures of alcohol use histories. A discrete factor approximation method is used to control for both endogeneity and sample selection (Mroz, 1999). Preliminary results indicate that alcohol use does have a negative effect of human capital production.  We find a positive interaction between heavy alcohol use and education, which is suggestive of a social effect of heavy alcohol use while in school.