Illegal Drug Use and Labor Supply

This paper investigates the relationship between labor supply and the consumption of marijuana and cocaine using data from the National Longitudinal Survey of Youth. Previous studies have yielded mixed evidence but have used potentially inadequate measures to account for the simultaneity between drug consumption and labor supply. I implement an instrumental variable procedure that utilizes a set of natural exogenous identifying variables for drug use, including regional cocaine prices and indicators of state marijuana decriminalization, and verify its validity with the relevant specification tests. Results indicate a substantial negative relationship between drug use and both employment and hours worked in both 1984 and 1988 that is always significant for males and sometimes significant for females. Hausman tests reveal that OLS estimates are biased down in magnitude, thus demonstrating the importance of controlling for simultaneity.