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Though there may be some controversy about the relative importance of financial incentives in explaining trends in retirement in the U.S., the larger part of the European studies appear to more conclusive 1 . Most European studies point at strong incentive effects from Social Security and Early Retirement schemes. This may be due to the strong disincentive effects that characterise most of these European systems | Health and Work of the Elderly Subjective Health Measures Reporting Errors and the Endogenous Relationship between Health and Work Marcel Kerkhofs Maarten Lindeboom Preliminary version November 1999 Organisation of Labour Market Research OSA Tilburg university. Free university of Amsterdam and Tinbergen Institute Adress for correspondence Department of Economics Free University of Amsterdam de Boelelaan 1105 1081 HV The Netherlands tel 31-20 -4446033 fax 31-20 -4446005 email mlindeboom@econ.vu.nl Abstract In empirical studies of retirement decisions of the elderly health is often found to have a large if not dominant effect. Depending on which health measures are used these estimated effects may be biased estimates of the causal effect of health on the dependent variable s .Research indicates that subjective self-assessed health measures may be affected by endogenous reporting behaviour and even if an objective health measure is used it is not likely to be strictly exogenous to labour market status or labour income. Health and labour market variables will be correlated because of unobserved individual-specific characteristics e.g. investments in human capital and health capital . Moreover one s labour market status may be expected to have a reverse causal effect on current and future health. In this paper we analyse the relative importance of these endogeneity and measurement issues in the context of a model of early retirement decisions. We state assumptions under which we can use relatively simple methods to assess the relative importance of state dependent reporting errors in individual responses to health questions. The estimation results indicate that among respondents receiving disability insurance allowance reporting errors are large and systematic and that therefore using these measures in retirement models may seriously bias the parameter estimates and the conclusions drawn from these. We furthermore found that health deteriorates with work and that the .
