The effect of drinking and smoking on the labour market outcomes of low-income young adults

Among adults the causal ‘drinking bonus’ and ‘smoking penalty’ have been estimated to be as large as 12% and 24%, respectively. The magnitudes of these effects compare in size with many active labour market programs targeted at low-income young adults. This article extends the literature by examining these relationships in such a group. Somewhat surprisingly the data indicate that just as in the greater population young drinkers have more favourable labour market outcomes than nondrinkers. However, when a fixed-effects approach is used to identify causal impacts there is no evidence that drinking has a positive impact on labour market outcomes and some evidence for negative returns to drinking. The smoking penalty is estimated to be much smaller among this group and not statistically significant. Finally, estimates suggest that the observed correlations between consumption and labour market outcomes are biased by unobserved characteristics of the individual as well as unobservables that change over time that are likely causing the treatment decision.