The Effect of Alcoholism on Earning Capacity

by Nicole MacPherson

This article was originally published in the summer 1998 issue of the Expert Witness.

It seems common sense to argue that alcoholics will experience reduced earning capacity. Thus, all else being equal, alcoholics will be eligible for lower damage awards than will other plaintiffs. What is often not clear, however, is how severe the effects of alcoholism will be.

The purpose of this article is to summarise the statistical literature concerning the effects of alcohol consumption on earnings and employment. One of the most important findings of this literature is that alcoholism has both direct and indirect effects on earnings. That is, there is evidence that alcoholics’ earnings are depressed both because alcoholism causes reduced labour productivity and because it discourages investments in “human capital” (e.g., education). Problem drinking is also found to increase unemployment.

Direct Effects

Alcoholism is considered to be a disease, and affects earnings as such. The physical and mental health problems associated with problem drinking have direct effects on labour market productivity and reliability. That is, sickness, hangover, late arrivals, extended lunch breaks, and early departures are some work characteristics that lead to reduced reliability and productivity. This in turn leads to lessened earnings and fewer promotions and raises.

Alcoholism can have other direct effects on wages, namely, alcoholism can affect career choices and stability. It is possible that alcoholics self-select into jobs that are less demanding, and therefore lower paying. The further advanced the state of alcoholism, the less the alcoholic is concerned about his or her career. Therefore, alcoholics tend to gravitate towards jobs that are not strenuous or taxing.

Indirect Effects

An important way in which alcoholism can affect earnings is through its effect on human capital characteristics. If the disease is advanced in youth, the alcoholic may not have the stamina to complete schooling, post-secondary or otherwise. This possible lack of education could lead to lower wages and selection into “dead-end” jobs. It is important to note that alcoholics may select into such jobs because of choice (the direct effect) or because of a lack of education (the indirect effect).

It is likely that alcoholics will have difficulties maintaining employment due to their condition. The reduced reliability discussed above can lead to job losses and decreased employability. The subsequent lack of work experience can lead to lower wages and earnings.

A significant indirect effect arises from familial and relationship problems associated with alcoholism. Alcoholics have higher divorce rates than non-alcoholics. As well, there is a higher probability of an abusive home life among problem drinkers. The emotional and mental strains arising from these factors can be expected to have negative impacts on productivity, and therefore earnings.

Empirical Evidence

Alcoholism’s effect on earnings has been the subject of a number of recent scholarly articles, which attempt to estimate this impact empirically. These studies indicate that, when direct and indirect effects are combined, alcoholics earn approximately 40 percent less than non-alcoholics. When human capital characteristics are controlled for, alcoholism alone leads to an 18 percent reduction in wages. That is, almost one half of the effect of alcoholism on earnings is due to lower human capital characteristics, namely education and work experience. Conversely, this implies that an alcoholic will earn approximately 18 percent less than will others with similar education levels and work histories.

It is significant to note that alcoholics earn less not only because of the effect heavy drinking has on human capital, but also because of the nature of alcoholism. A recent study found that alcoholics are more likely to be unemployed than alcoholics, and earn less when they are employed, even after controlling for the effect of education and experience. As the disease progresses, the earnings potential of the alcoholic lessens.

Alcoholism and employment have a causal relationship. Alcohol abuse negatively affects employment, but lack of work also affects drinking habits. Depression and stress resulting from unemployment can lead to increased reliance on alcohol and other drugs. Alcoholics can enter a vicious circle in that the longer an individual is unemployed, the more advanced the state of alcoholism. As the disease becomes more debilitating, becoming employed is increasingly difficult.

Recent medical research has found that moderate alcohol use leads to health benefits such as reduced risk of cardiovascular disease. Since healthy employees are productive employees, it is not unreasonable to suggest that moderate drinking can lead to greater productivity, and therefore higher earnings. In fact, there is evidence to support the hypothesis that alcohol and earnings have a parabolic relationship. That is, teetotalers and heavy drinkers both earn less than moderate drinkers. In fact, studies show that non-drinkers earn between eight and ten percent less than moderate drinkers. It has been estimated that wages peak for individuals consuming an average of 2.40 drinks per day, which is consistent with the medical literature. Individuals who do not drink at all may miss out on the health benefits of moderate drinking, as well as on social opportunities and networking to further their careers. Conversely, alcoholism deteriorates one’s state of health. As well, alcoholics may endure public shame because of their condition, and this can decrease the opportunities to advance their careers at social functions.

It is vital to realize that a future alcoholic may currently display only minor symptoms of problem drinking. Alcoholism is a disease, and when left untreated can have ravaging effects on the individual’s physical and mental states. These effects can have significant negative impacts on employment, productivity, and earnings.

The lost productivity and lowered earnings of alcoholics are significant costs that have merited recent attention in the economic literature. The alcoholic and his or her family suffers from lowered earnings. Employers and co-workers suffer from the alcoholic’s lost productivity. In addition to the well-known costs of alcoholism, illnesses, automobile accidents, and crime, problem drinking leads to decreased productivity and therefore, lower wages and earnings.


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Nicole MacPherson was a Master of Arts student at the University of Calgary. She wrote a thesis on the topic of “Alcohol, Gender, and Labour Market Outcomes.”