4.1 Measuring health status
Health is clearly an important factor in the retirement decision. However, identifying the effect of health on retirement is beset by various methodological challenges. This section provides a brief overview of some of these issues.
HWR and NZLSA contain multiple measures of health, including a five-point rating of general health, from poor to excellent (henceforth calledself-rated health), as well as more specific questions pertaining to activity limitation and chronic condition.
While there is some evidence showing self-rated health measures are good predictors of mortality (Idler and Benyamini, 1997), there is debate around the extent to which self-rated health measures correspond to actual health. One concern regarding their use is that of “justification bias”. This can arise when an individual reports a lower subjective health rating, to rationalise their withdrawal from the labour force. This rationalisation can lead to an over-estimated negative effect of health on labour force participation. However, it is possible that such a desire to rationalise retirement is less prevalent now, owing to changing social norms and attitudes toward retirement.
Furthermore, there is no reason to believe that self-rated measures of health are necessarily comparable across individuals. This is because there is no commonly defined reference point. Specifically, there may be state-dependent reporting bias, whereby different groups within a population assess their health relative to different thresholds, even though they may have the same underlying level of “true” health (Deschryvere, 2005).
Another issue is that of reverse causality: withdrawal from the labour force may precede, and possibly cause, deterioration in health, and vice versa, so that explicitly determining the direction of causality becomes difficult. Instrumental variables such as expected mortality or other “objective” measures are sometimes used in an attempt to determine the direction of causality. However, finding a convincing instrument is not a simple task (Currie and Madrian, 1999). A valid instrument must have an effect on labour force participation only through the health measure suspected to be endogenous. Bound (1991) aimed to circumvent issues of endogeneity and measurement error by creating a latent health stock, estimating a model where self-rated health is theorised to be a function of more objective health measures such mortality or activity limitation. The predicted health stock measure is then used in analysis, and is analogous to instrumenting subjective measures of health with objective measures. Objective measures of health on their own (for example, indicators of chronic condition, or healthcare utilisation) may not measure aspects of health relevant for the participation decision (Bound, 1991).
The potential problem of reverse causality is not explicitly addressed in this paper, and there is a possibility that labour market status may affect health status. One hypothesis is that such change may be expected to take some time to manifest itself. That is, on average, the effects of retirement on health status would arise over a period of time, rather as an immediate result of retirement, suggesting a negligible contemporaneous effect. This has been empirically corroborated for older working-age males (Cai and Kalb, 2006). This is in contrast to a health shock, which can clearly be conceived to impair current work capacity. However, this issue is not empirically resolved here.
A final issue is that of unobservable omitted-variables bias. If there are unobservable characteristics, which may affect both health status and labour force participation (for example, degree of risk aversion, or time preference), this can confound identification of the direct effect of health on labour force participation.