Does Smoking Affect Wages?

Previous studies have not reached a consensus on whether there exists a causal relationship between smoking and wages. This study aims to fill this gap by providing new empirical evidence from a rich survey panel and admin data from the social security records of German individuals. On average, smokers earn 15% less. This raw gap shrinks to 9.5 - 1.5% after controlling for a large set of observable characteristics. To deal with unobserved time-varying factors and all potential sources of endogeneity, we propose a novel instrument, which provides exogenous reduction in smoking behavior: Smoking bans at schools, introduced by the federal states at different years. While OLS estimates appear to be negatively biased, reduced form and instrumental variable estimates indicate no causal overall effect of smoking on wages. However, we find highly significant effects in different directions by gender: a wage premium for male smokers and a wage penalty for female smokers.