The Wage Effects of Personal Smoking History

Why do we observe a wage differential between smokers and non-smokers? Pooling reports of current and prior smoking activity across 15 years from the Panel Study of Income Dynamics (PSID) allows the reconstruction of individual smoking histories. Dividing the sample into smoking history groups, the four largest of which are: persistent smokers, never smokers, former smokers, and future quitters reveals that there is no observed wage gap between former smokers and those who have never smoked. There is, however, a wage gap between those smokers who will continue smoking and three other groups of individuals: (1) those smokers who will quit smoking in the future, (2) those smokers who have quit smoking already, and (3) those who never smoked. The wage gap between smokers and non-smokers, observed in the 1986 cross-section, is largely driven by those who persist as smokers, 1986-2001. These results support the hypothesis that the cross-sectional wage differential is not driven by smoking per se, but may be driven by a non-causal explanation. One plausible interpretation is that a common factor such as myopia, leads to reduced investment in both health capital or firm-specific or other human capital.