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

of the decline compared to other factors, such as demographics. Furthermore, it is pointed out that a
large part of the decline in labour supply due to health problems is caused by mental illness.
Having pointed out that mental health has an influence on the participation in the labour market; the
question can be asked whether causality does not run the other way? There might be a possibility
that the individual’s participation status influences his or her health. Although of great importance,
there is no clear-cut answer to this question. Sickles and Taubman (1986) have found no evidence
of reverse causality between retirement and the state of health. On the contrary, they refer to an
article that found that the health of retirees did not get any worse than the health of a control group
in the labour force. The opposite result is found by Agerbo et al. (1998) who, in an empirical
analysis of mental disorders, study the effect of unemployment on the patient’s first psychiatric
hospitalisation. They study the effect both at the macro and the individual level. At the macro level
higher rates of unemployment were followed by higher rates of admission to psychiatric hospitals.
Also at the individual level being unemployed in one or two years preceding an admission,
increased the likelihood of admittance. Accordingly, Agerbo et al. (1998) conclude that the risk of
mental illness requiring hospitalisation is predicted by unemployment and labour force status.
Ruhm (1992) assumes that causality runs from health to employment, but allows for the possibility
that these variables are simultaneously determined. According to Ruhm (1992) in an analysis the
coefficient on health will seize the joint effect of health on employment and employment on health.
Ruhm (1992) mentions one article that allowed for reverse causality in a study of hours of work and
health, but who obtained no evidence that causality runs the opposite way. <strong>An</strong>derson and
Burkhauser (1985) notice that results from previous literature, modelling health with a single
equation and assuming health to be exogenous, might be biased. They draw attention to the fact that
health is endogenously determined and they model health and work effort simultaneously. Also
Sickles and Taubman (1986) acknowledge that health is endogenously determined and include it in
the individual’s utility function in line with consumption and leisure. They argue that poor health
reduces the marginal utility of consumption and of leisure, and at the same time decreases utility
directly. The notion of health as a commodity that consumers demand became widespread in the
1960’s and was formulated into a model by Grossman (1972).
2.2.1 Model of the demand for health – the Grossman model
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