The chicken or the egg?: Endogeneity in labour market participation of informal carers in England

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Abstract

Around 14% of the UK labour force has informal care responsibilities and almost everyone in society will be an informal carer in their lifetime. A well-known fact in the small economic literature on informal care is the apparent negative relation between care responsibilities and labour market participation. Yet, caring and labour market participation may be endogenous. Using an instrumental variable approach and panel data techniques and employing data from the British Household Panel Study from 1991 to 2002, this paper shows that not accommodating for endogeneity in the labour market participation equation may significantly overestimate the impact care exhibits on the employment decision of informal carers. Moreover, it is shown that a negative impact on employment only applies to some care-types. Policy implications are derived.

Introduction

Informal care has become an important pillar of the British welfare state. According to the 2001 Census, there were about 5.2 million informal carers in England and Wales – 1 in 10 of the population – looking after sick, disabled, and elderly people. The General Household Survey (GHS) estimates the total number to be 6.8 million carers for the whole of GB in 2000 (ONS, 2002).1 More than 14% of the working age population is currently providing unpaid care. Many of them not only care for partners and family but also for friends and neighbours.

Changes in social and economic factors are likely to further impact on the informal and formal care market in the short and medium term. Increasing longevity and rising rates of disability will undoubtedly continue to increase the demand for care services. At the same time, the provision of home care by Social Services has been decreasing while higher home ownership rates among the elderly population increase the demand for these services.

Furthermore, changing family patterns such as lower marriage rates, fewer children, greater geographic mobility, and declines in intergenerational co-residence are also likely to contribute to changes in informal care patterns over time as the vast majority of informal carers looks after parents and spouses. A sound understanding of the informal care market is therefore crucial.

In the current buoyant British labour market a particular concern is the link between care and employment. Indeed many individuals combine work and caring responsibilities often at the expense of career prospects, leisure time, income, and pension entitlements (Parker, 1990, Carmichael and Charles, 2003, Heitmueller and Inglis, 2004). Both the Prime Minister and the Department for Trade and Industry have recently emphasised the need to extend flexible working arrangements to informal carers given the apparent success of these schemes for young parents.

This paper studies how care responsibilities affect the labour market participation decision. Generally, adjustments can occur at the extensive or intensive margin. In the former, work is given up entirely or not taken up in the first place, in the latter hours of work are adjusted for example by switching from full- to part-time. In the following, only adjustments at the extensive margin are considered.

Current wisdom has it that care obligations reduce employment prospects. Yet, the central question in this paper is whether the caring decision is endogenous with respect to the labour market participation. In other words, do individuals give up work in order to engage in informal care, or do individuals take up care responsibilities in the absence of employment opportunities? This is a crucial distinction from a policy makers’ point of view. If caring keeps people from working, policy should focus on the provision of formal care. However, if on the other hand unemployability is the reason for people to take up caring responsibilities, an expansion of the formal care market will not necessarily get these people into work.

Section snippets

Labour market participation and informal care

Informal care and its impact on the labour market participation has widely been ignored in the British literature, Carmichael and Charles, 1998, Carmichael and Charles, 2003 being an exception. They postulate that the effect of caring on labour supply can be broken down into a substitution and income effect. With time being scarce caring responsibilities will increase the reservation wage and reduce labour supply (substitution effect). Yet, working less will lead to a reduction in earnings

The data

The analysis in this paper is based on data from the British Household Panel Study (BHPS) from 1991 to 2002. Each year, over 5000 households consisting of roughly 10,000 individuals have been interviewed. The BHPS offers a wide range of variables and is nationally representative. For the purpose of our analysis, only individuals who are aged 16–64 (59 for women), and not working for the armed forces or in self-employment. The sample has also been limited to England to avoid weighting issues

Choice of instruments

One way of solving the endogeneity problem in cross-section data is to identify an instrument that is highly correlated with the caring decision but not with the labour market participation. Obviously, the reason why an individual cares is because family or friends are sick or disabled and require their help. The health status of family and friends is therefore highly correlated with the caring decision (Ettner, 1996). At the same time and as argued above, it is unlikely to impact on the

Estimation models

The central hypothesis of this paper is that some individual unobserved characteristics are correlated with the care variable leading to an endogeneity bias. In the previous section, IV methods have been employed to correct for such bias. However, given the availability of panel data unobserved heterogeneity may be dealt with more directly. Parts of these unobserved characteristics might only be correlated with the caring decision and one should not be worried about them. However, other

Conclusion and implications

Informal care is an important pillar of the British welfare system and will carry even more weight in the years to come given an aging population and reduced Social Services. Many informal carers combine both work and caring responsibilities. Around 15% of the English labour force was engaged in informal care in 2002.

In this environment, policy makers face a trade-off. On the one hand, care needs in society can only be met if people continue to provide care informally for sick, disabled or

Acknowledgements

I am grateful for comments by an anonymous referee and David Bell, Kirsty Inglis and in particular by Pierre-Carl Michaud.

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An earlier version of this paper is available as IZA discussion paper. The views expressed in this paper do not necessarily reflect the opinion of the Prime Minister's Strategy Unit.

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