An Analysis on Danish Micro Data - School of Economics and ...

employers more reluctant to hire new employees, since they know it is difficult to dismiss them
again in an economic downturn. 31 <strong>An</strong>other example of a demand side restriction is the
unemployment rate. If the unemployment rate is very high, this reduces the probability of being
employed. Characteristics specific to each individual consist of for instance his age, number of
children, education and health. How exactly health relates to the probability of being employed is
explained in greater detail in the next section.
2.2 The influence of health problems on labour force participation
This thesis looks at a marginal group in the labour market, namely people who are physically and
presumably mentally ill. As to be expected, health problems have an influence on their rate of
participation on the labour market. In what follows, these effects are reflected upon.
According to Ruhm (1992) problems of bad health are probable to increase the disutility of
working, and at the same time decrease the marginal productivity. He analyzes the effects of
physical and mental health on female labour supply and his cross-tabular analysis insinuates that the
state of health has at least some significance in the probability of employment and participation in
the labour force. His analyses are based on the use of medicine taken to treat particular diseases,
and it turns out that there is a negative relationship between bad health and participation in the
labour force. Comparing physical and mental illness, the negative relationship is even more
noticeable in the case of medicine used for mental illness. In addition, Ruhm (1992) looks at the
economywide effects by comparing demographic and health effects regarding aggregate
participation and employment rates. He finds that demographic and economic factors rather than
health factors play a role in the decision of labour supply. The analysis is taken a step further by
comparing the effects of physical and mental health on labour force participation and employment.
Ruhm (1992) finds that mental health explains a considerable part of the decline in labour supply
caused by health-related problems compared to the attention paid to mental illness in the analysis.
With regard to the effect on employment, the importance of mental health is even larger relatively
than physical health. Restricting his analysis to women of the age 50 and above, Ruhm (1992) finds
that health variables account for even more of the decline in both labour force participation and
employment. With ageing the role of physical health becomes relatively more important though. To
conclude, Ruhm (1992) observes that health problems play an important part in the labour supply
decision at the individual level, but at the economywide level health problems explain less than half
31 Cahuc and Zylberberg (2004)
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