Why Do Dancers Smoke

The discount rate is a key determinant of investments in human capital and occupational choice. Individuals who are less future oriented – i.e. have a higher discount rate – are less likely to invest in human capital and hence more likely to select into careers with lower and flatter earnings profiles. Since an individual’s discount rate is unobservable, we use smoking behavior as a proxy to study the role of discounting on wage dynamics. Using data from the National Longitudinal Surveys of Youth (1979-94) we find that smokers, compared to their non-smoker counterparts, earn lower wages at the time they first enter the labor market and experience substantially lower rates of wage growth in the first decade of their careers. These differences in wage dynamics among smokers and non-smokers are consistent with discounting hypothesis, and highly robust to an extensive array of control variables.