I’ve written a lot about these ‘cost of vice’ studies and I will not go so far as to say that Policy Exchange’s is the worst in a highly competitive field. It is, nevertheless, poor. Its primary aim appeared to be finding an annual ‘cost of smoking’ that exceeded the annual revenue from tobacco taxes, thereby justifying higher tobacco taxes. In common with many other cost-of-vice studies, Policy Exchange did so by attributing costs to society which are actually borne by smokers—notably, lost output from early death, which was the largest of the total’s components (£4.1 billion)—and by coming up with an extravagantly high figure of £2.9 billion as being the “cost” of smoking breaks.
They came up with the smoking breaks figure by estimating how many minutes smokers spent on breaks and multiplying it by the average wage-per-minute in the UK. There are a number of problems with this, some of which I mentioned at the time. Aside from the fact that lost productivity due to smoking breaks could just as easily be described as a cost of smoking bans as a cost of smoking, nonsmokers also have breaks and it is far from clear that smokers are allowed more breaks than anyone else.
More importantly, regardless of whether a smoker—or anyone else—is less productive as a result of excessive breaks, absenteeism or premature mortality, the cost falls on the individual, not on the taxpayer. Workers who are less productive pay the price. They are passed over for promotion. They get lower wages. Ultimately, they might lose their jobs. The free market has a way of punishing those who work least while rewarding those who work hardest.
As it happens, there is evidence that smokers—on average—earn lower wages than nonsmokers, as the Wall Street Journal recently reported…
“Former smokers earn higher wages than smokers and people who have never smoked, according to new research. [Smokers] earned about 80% of nonsmokers’ wages. Even one cigarette a day triggers a wage gap between smokers and nonsmokers, the economists write. “Smoking erodes the value of your human capital in the labor market,” said Ms. Pitts.”
There is a major correlation/causation problem here. People who smoke have different character traits to those who have never smoked. They are more likely to gamble and more likely to drink. They are also more likely to be murdered, an outcome that can surely not be attributed to the act of putting tobacco in the mouth and lighting it. (As one wry epidemiologist put it, “Unless the provisional wing of the health education lobby has moved on to a direct action phase, during which they shoot smokers, this association is very unlikely to be causal.”)
Does smoking make people less productive or are less productive (and less qualified) people more likely to smoke? The study suggests the latter.
“Are tobacco users earning less because smoking reduces their productivity? Ms. Hotckiss and Ms. Pitts didn’t find evidence for this. The two economists tested the relationship between wages and smoking intensity and found that the frequency at which people smoke doesn’t significantly affect their earnings. “The idea is that if the productivity was affected by smoking, then heavier smokers would have a much larger wage gap. We didn’t find support for this hypothesis,” said Ms. Pitts.”
In other words, it is not smoking breaks—or even smoking per se—that leads to lower wages. If the smoking breaks were the cause of the lost productivity then one would expect those who took the most breaks to be least productive. This study did not find such an effect. There was no difference in earnings between those who smoked five cigarettes a day and those who smoked twenty or more cigarettes a day. Rather it is the characteristics of smokers, sometimes combined with employer prejudice against them, which make it more likely that they will, on average, receive lower wages. One such characteristic is education…
“They noted that education level was the largest contributing variable. Nonsmokers tend to be more educated”.
Indeed they do. And there are many other social-economic disparities between smokers and nonsmokers that can explain the wage gap.
This study demonstrates two important points that escaped Policy Exchange when they produced their ‘cost of smoking’ estimate.
Firstly, people’s wages reflect their performance. The smokers in this study received 20 per cent less than the nonsmokers. This is not a public cost. Their lack of productivity is internalised through the wage mechanism. Since reduced earnings are not a cost to the taxpayer, the notion put forward by Policy Exchange that the price of cigarettes should be raised to compensate society for this cost is wrong-headed. There is no one to compensate and therefore no need for a Pigovian tax.
Secondly, it is important to distinguish cause from effect. In this instance, smoking breaks are a symptom of one of the underlying differences between smokers and nonsmokers. Policy Exchange assumed that if there were no smoking breaks, smokers would be more productive and therefore would earn the same as nonsmokers. This is plausible—and it could even be true in some individual cases—but, generally speaking, it is false. The study concludes that “the smoking wage gap is not being driven by differences in productivity, but, rather, by the endowments smokers bring to the market (e.g., educational attainment)”.
In sum, smoking is associated with lower wages, but smoking breaks are not the reason. Whatever the true reasons may be, the cost of being a smoker in the workplace is reflected in lower wages for smokers, not higher taxes for nonsmokers.