Health and Retirement Decisions: An Update of the Literature

Abstract

This paper surveys the relation between the labor supply and the health of the elderly, based on major studies conducted earlier and new literature. Most of the empirical literature on the topic is drawn from American data, although new European datasets have enabled analysis in several EU countries. The paper complements previous surveys in that it includes recent European results and overviews most of the latest developments in micro-modelling issues. The quest for unbiased estimates of the effect of health on retirement is characterized by several challenges. One important challenge is the endogenous character of the relationship between health and retirement. A second challenge concerns the reporting bias to which certain health measures may be prone. The empirical literature surveyed suggests that poor health reduces the capacity to work and has a substantial impact on labor force participation. The exact magnitude, however, is sensitive to both the choice of health measures and the identification assumptions. For that reason a comparison of health effects between different studies is difficult. Nevertheless, what has been proven is that the old assumption that objective health measures are superior to subjective health measures needs to be applied with caution.