Everything in Moderation: Separating State Dependence from Unobserved Heterogeneity Between Alcohol and Employment

Previous literature presents mixed evidence on the effect of alcohol consumption on labor market outcomes. Due to limitations of available structural methods that model state dependence and unobserved heterogeneity, previous literature has not separately identified the causal pathways linking moderate versus heavy alcohol use to employment. This study develops a multiple-equation dynamic discrete choice ordered logit model, separately identifying the contribution of state dependence (within and between outcomes) and unobserved heterogeneity. Using this newly-developed methodology, this study finds that moderate alcohol use increases employment, indicating that policies that target alcohol consumption separately by dosage level may be beneficial to employment.