Sleep Pays

Sleep Pays

An econometric analysis
12/30/2011 Lahore University of Management Sciences

Abstract: This paper uses the data in Survey 75 to build a relationship between sleep and hourly wage. A number of variables are introduced to ensure unbiased and consistent estimate of beta coefficients on sleep. The paper presents interesting insights into the relationship between sleeps, naps, age, productivity, health and hourly wage. The paper concludes with a result that daily hourly sleep has a positive association with hourly wage. However, the authors do feel that there were certain data limitations which severely constrained their ability for better analysis.

Group 10 Taimur Anwar Zuberi Bheesham Lal Qadeeruddin Ahmed 2013-02-0316 2013-02-0213 2013-02-0097

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Marx and Engels pointed out that labor is a commodity, like any other, and its price is therefore determined by exactly the same laws that apply to other commodities, which in effect means that labor sells labor-power on the market and is compensated for it in wages paid to it. The structure of the paper is such that the authors will firstly build upon microeconomic theory of wages, and after establishing a theoretical basis for the paper will step by step build econometric models. The paper is written in a manner such that the literature review, as well as, recommendations and limitation, along with the authors analysis are presented after each econometric model. The authors feel that this is a better way, since it helps maintain the flow of the paper, and the reader will not need to juggle through portions of the paper. Relevant drawbacks and inspection of variables is done side-by-side. The data set being used for the paper is cross sectional, with a total of 706 observations. However, the hrwage of 174 or 24.6% of the total data is not available. Everybody who has not reported their hourly wage is not considered to be part of the labor force (inlf = 0). This is not a large data sample, which is not good since higher n leads to lower variance, and also implies asymptotic normality of the distribution of sample estimates under central limit theorem. The basic question of interest or the hypothesis that the author will try to answer by means of this paper is, does sleep affect hourly wage. Henceforth, it follows that the population regression function of interest now becomes, hrwage = 0 + 1a sleep* + u (1)

This is our basic simple regression model, where u is the error term containing all other explanatory variables that explain hrwage. 1a explains the marginal change in hrwage as sleep increases by one minute. Before jumping to the data set or econometrics, the authors would like to give a reasoning based on economic theory for the abovementioned relationship. Wage Fig. 1 Economic theory suggests that in a perfectly competitive goods market MR = MC (marginal revenue equals marginal cost.) The diagram labeled Fig. 1 shows, the firm will continue to add units of labor until wage (w) = MRPL (marginal productivity of labor.) Since, MRPL = MR*MPL which is equal to w; it means that w and MPL are have a MRPL positive relationship. In other words, productivity affects wage. The authors recognize obvious constraints in the relationship Amount of Labor between productivity and wages. The most apparent one is that wage data often only includes cash wages, and does not normally account for fringe benefits and perks. Secondly, as Mankiw points out that often average productivity is compared with median wage or average wage of production workers only, instead of average real wage; the latter being the correct comparison from the standpoint of economic theory. Lastly, given the fast pace of technological development and the global wave of recent industrialization, the CobbDouglas assumption of constant factor shares is far from ideal. Therefore, given the fall in labors share in income, and capital being the major input, marginal productivity is no longer equal to average productivity (the latter is what productivity data generally measure.) In short, sleep affects wages through productivity, i.e. to say sleep has an effect on productivity and productivity effects hourly wage. The paper by Biddle and Hamermesh, which states that
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sleep affects wages through its impact on labor productivity, adds weight to the claim that sleep and productivity are related. Additional evidence comes from Rosekind et al, which reports after studying a large sample size that sleep loss related productivity losses compound to $1967 per employee annually to the employers. Even from a medical standpoint, JAMA points out that sleep loss is associated with significant neurobehavioral impairments, translating as loss in productivity at the workplace. Moreover, the authors would like to introduce the reader to the idea of sleep debt and internal body cycles here. The body follows a sleep and stomach cycle, and for individuals who do not maintain a healthy sleep-food routine, they are prone to having sleep-associated problems. To add to that, accumulation of lost sleep diminishes ones ability to perform complex cognitive functions. Studies have shown that frontal lobe of the brain is particularly responsive to homeostatic sleep pressure (Gottselig, 2006) Looking at Kernel density of hrwage (Graph 2a in the appendix), it is noted that the variable is positively skewed with a considerably high peak value. Therefore, the log of hrwage is taken, which is more normally distributed than hrwage, as shown in Graph 2b in appendix B. The new variable is called lhrwage. The log lessens the problems of positive variables being skewed or heteroskedastic. Moreover, taking logs usually narrows the range of the variable, which makes the data less sensitive to outliers. (Wooldridge) A major problem with sleep variable is that it is self reported. In other words, minutes of sleep is a variable that is not easily observable; unlike wages, ethnicity and marital status. Data on these variables is likely to be self reported, which is prone to lead to a measurement error (actual value of sleep*i could be equal to sleepi + i.) This measurement error could lead to an attenuation bias, i.e. if 1a is positive, 1a will tend to underestimate 1a. This error can be mitigated by taking another measurement of sleep- sleepi**- and making it an IV for sleepi in the above equation. However, due to unavailability of data, the authors have to proceed with reported sleep. The authors have scaled the variable, sleep, for cosmetic purposes, by introducing another variable hrsleep, described in appendix A, table 1. log (hrwage) = 0 + 1b hrsleep + u (2)

After running the regression of equation (2), the coefficient on 1b is -0.0413 (0.0267), which is statistically insignificant at the 5% confidence interval. The sign of the beta coefficient is negative, which is counter intuitive, and goes against the reasoning presented above. As seen in the literature above, wage and sleep have a positive relationship, unlike the one shown in our results from running this simple regression model in (2). The interpretation from the coefficient on sleep is that with an additional one-hour increase in sleep, wage decreases by 4.1%. The contradictory results might be due to an omitted variable bias, and by conducting the Ramseys RESET, this claim of the authors is confirmed. Intuitively, sleep has a diminishing effect on wage; simply put, too much sleep could lead to a decrease in wage. To put that econometrically, a quadratic function of hrsleep should be added to the right hand side of equation (2). (The square of hrsleep is added to equation (2), to account for this.) Thus, the new equation becomes, log (hrwage) = 0 + 1c hrsleep + 2a sqsleep + u (3)

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The coefficients on 1c and 2a are 0.355 (0.231) and -0.0257 (0.0149), respectively. The results of the regression are as expected, with the coefficient of 1c positive and 2a negative. The data affirms the assertion that sleep indeed has a diminishing effect on wage. The maximum of equation (3) is at 6.89 hours. This suggests, that up to around 7 hours sleep per night, additional sleep has a positive impact on wage, after which more sleep results in lower productivity or lesser wage. A modest review of the literature did not yield any study about the relationship mentioned in equation (3), and the authors feel that there is a great scope for research here. It must be noted that sleep in all the above equations only refers to sleep at night, and not naps. Therefore, the authors feel that the impact of naps on hrwage would be interesting. Colloquially speaking, this also gives us a chance to put the adage of power-naps to econometric testing. In other words, whereby much has been hypothesized above about the link between sleep at night, and hourly wage, the authors enhance their understanding by adding naps to the right hand side of equation (3), thereby studying the impact of naps on wage, too. For cosmetic reasons, naps have been scaled as daily hourly nap- hrdnaps. Therefore, the regression equation becomes, log (hrwage) = 0 + 1d hrsleep + 2b sqsleep + 3a hrdnaps + u (4)

hrdnaps, has the same measurement error problems, as does sleep. Since naps will also be selfreported the odds of people in the survey of exactly knowing their amount of naps is even less than that for sleep. Despite this drawback, the authors feel that it is quite important that naps be included in the regression. The coefficient on 3a is quite interesting. A negative coefficient, with -0.0950 (.0489) economic significant and a p-value of 0.052, tell us that a half-hour nap, decreases expected hourly wage by around 4.75%, keeping night sleep constant. This occurrence can be understood by means of sleep disturbances i.e. those who may be unable to sleep well during the night have to take naps to compensate for lost sleep during the night. For those suffering with sleep disturbances like insomnia or other sleep related disorders, or even fatigue and/or stress could cause one to take naps, since the individual is for medical and psychological reasons- unable to sleep well at night. Also naps could, as mentioned above, be associated with bad allocation of time and sleep cycle. Simply put, voluntary irregular sleep patterns could be associated with sleep deficiencies at night, and resultantly, naps during daytime. Instead of these naps boosting productivity, they just ensure that the body is able to maintain minimal brain and physiological functions. Moreover, even greater detrimental effects of restricted night time sleeps including mood disturbances have been studied by Park, Dinges, William and others. Walker in his trial reports that the detrimental effects of restrictive night sleep build up over time. The negative effect of naps could also be due to data limitations. By data limitations, the authors refer to the fact that a mere 38% of the data (268 out of 706) takes naps and is part of the labor force. A larger sample could really aid in coming to a better understanding of the relationship between naps and wage, but for now the authors report a reserved judgment that naps have a negative effect (on productivity and) wage. Apart from that, the authors also feel that there are even greater problems in the data. Keeping aside the already touched upon issue of self reported data bias, the respondents are not asked about sleep disorders or other stress-related sleep dysfunctions. Similarly, medical conditions like narcolepsy, which cause individual to take excess daytime sleep have not been specifically accounted for. A deeper analysis of such conditions could be very helpful in ensuring a better understanding of the relationship between wage, naps and sleep. Such medical conditions that

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cause lack of sleep at night could also have effects on labor productivity. For instance, stress could affect ones sleep, as well as ones ability to perform task that require high concentration at the workplace, and henceforth, the impact of stress enhance loss of productivity directly as well as indirectly, through sleep-loss. After considering sleep and sleep-related medical conditions, the authors shall proceed to studying the impact of age. Age, the authors consider, affects both sleep and wage. Moreover, the marginal affect of age on the productivity is a function of age itself, hence, the authors shall be considering the age2 term as well. Age even affects health. Physical strength and health are reduced as workers grow older. Therefore, additionally, because of the preceding discussion on health and medical factors affecting wage and productivity, the authors have also decided to include the dummy of good health as explanatory variable in the next regression. The equation now becomes, log (hrwage) = 0 + 1d hrsleep + 2b sqsleep + 3a hrdnaps + 4a age + 5a age2 + 6a gdhlth + u

(5)

Intuitively speaking, 4a and 6a should be positive, and 5a should be negative- meaning age has a diminishing effect on wage, whereby, good health has the obvious positive effect on wage. To check this intuitive model, the authors run the abovementioned regression, which confirms our model. The coefficients of age and age2 give around 44 years of age as the turning point for wage. The coefficient on gdhealth of 0.0673 (0.0866) can be graphically explained as an intercept value that is 0.0673 higher than the 0 intercept. A careful review of literature tells us the relationship between age, wage and productivity; and age and sleep. The discussion follows. The relationship between age and sleep is further backed by the study by J. C. Marque et al. whereas, the relationship between sleep and wage is supported by the study by Jan C. van Ours. The study by Marque et al, (for a sample size of 2767 healthy wage earners in the age group of 32 to 52) finds age and stress to be associated with sleep complaints. The results drawn by means of an ANOVA test with sleep difficulty index as the dependent variable, found age and stress to be very significant (p0.0001 for both). The study by Jan C. van Ours is based on panel data of 4,437 observations. The study finds that age has a positive association with wage, as well as, productivity. Furthermore, this study finds that wage and productivity are affected by age in a similar manner. This finding is in contradiction to earlier studies where productivity was either unaffected by wage or there was a considerable gap between the graph of wage and productivity plotted against age. The study also finds a clear hump-shape relationship between age and productivity. The workers aged between 35 and 45 are shown to have the maximum productivity, while the productivity of younger and older workers is lower. After having discussed age in sheer detail, the authors focus on good health. Good health has been discussed earlier in the paper and the discussion here follows from that. The data does not tell us as to how the data on good health was calculated, and hence, severely limits our understanding. The basic problem is that good health is binary variable, and therefore, it takes no account as to the severity of disease one suffers. From a terminally ill chronic leukemia patient to a mere influenza-virus affected individual shall both be considered to be in ill-health (gdhlth =0). Moreover, as mentioned above, health is not only physiological but also mental. However, we do not know if the data has been collected through household surveys only, or were physicians

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asked to evaluate on a persons health. If the data on good health is self reported it could lead to a biased coefficient since, as it would be based on ones perception of ones health rather than on a robust medical report. It is not easy for one to quantify or make a sure shot judgment call on their mental health; rather a psychiatrist could make that decision. Lastly, it does not account for disabilities- which could greatly impair ones productivity. A person who has lost a limb in an accident would be less productive than the average laborer, but would not be classified in poorhealth. The authors strongly feel that all these issues need to be taken into account. The total income of the household or the wealth of the individual also affects both hourly wage and sleep. It affects the former through the unobservable factor of motivation (if someone has enough family earning, his/her motivation for earning more would be lesser); it affects sleep since poorer people are likely to be victims of financial worry, low job satisfaction and greater daily stress. A study by Gallup-Healthways reports that 35% of those with incomes of less than $24,000- the highest among all income and demographic categories- did not sleep well compared to 28% of individuals with incomes of $90,000 or higher. The equation now becomes, log (hrwage) = 0 + 1e hrsleep + 2c sqsleep + 3b hrdnaps + 4b age + 5b age2 + 6b gdhlth + 7b ltotinc + u

(6)

Therefore, we have added another explanatory variable ltotinc, in equation (6), which is the log of the sum of spousal income and other income, given in the data. 7b measures elasticity, whose interpretation is that a 1%-increase in total other income decreases expected daily hourly wage by 0.11%, keeping all other factors constant. A negative coefficient on 7b ties in well with our model, since higher household incomes lessens incentive/ enthusiasm to earn. Next, the authors assess the impact of dummy variables: log (hrwage) = 0 + 1f hrsleep + 2d sqsleep + 3c hrdnaps + 4c age + 5c age2 + 6c gdhlth+ +7c ltotinc + 8a female + 9a clerical + 10a construc + 11a selfe + u (7) The above mentioned equation (6) has four dummy variables for gender, clerical or construction worker and self employment. The authors shall proceed with a systematic description of each dummy variable, but before that tests are conducted to check for heteroskedasticity and functional form misspecifications. Ramsey RESET tells us that the model has no omitted variables. The special case of the white test for heteroskedasticity rejects H0: the model is heteroskedastic. Since, equation (7) is heteroskedastic, OLS is no longer the best linear unbiased estimate, and therefore we shall use the robust standard errors. Furthermore, the model as a whole is jointly highly significant (F(11, 520) = 15.72, p-value= 0.000) Using these robust standard errors, hrsleep and sqsleep are both statistically significant at the 10% significance level, however, not at the 5% level. The authors calculate the ideal amount of sleep at night to be 7.32 hours (7 hours 19 minutes) i.e. after this additional sleep is expected to lead to a loss in productivity, and hence, lower hourly wage. The most productive age is found to be 44.74 years (44 years 9 months), and after that expected hourly wage will tend to fall. These results, however, are based on the limited data available, and generalizations to the populations must be made in a calculated manner. It must be

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kept in mind that the data was collected a little less than four decades ago, and many things have changed since then, including the society. Lastly, a negative coefficient on female means that females tend to earn less hourly wage than men and a major reason for that could be household work and childcare, which are generally considered to be a females responsibility in division of labor at the home. This puts into perspective the idea that household work, which is generally done by females, affects both, female productivity and sleep. The positive coefficient on clerical and negative coefficient on construc creates a distinction between manual, physically tiring work and office work, which is less strenuous in nature. Since, construc workers are likely to get more tired due to the physical exertion in their occupation, compared to clerical workers working the same number of hours in a day, the former will tend to accumulate sleep debt, lethargy, fatigue and resultantly, be less productive than their peers in the labor force. Self employment also has a negative coefficient and probably has the most interesting interpretation. Those who are self employed generally will not tend to have fixed office hours, and it is possible that there would be less distinction between their work and personal life. Therefore, a self employed individual would have additional stress and an irregular sleep cycle. All the results presented, however, are based on the limited data available, and generalizations to the populations must be made in a calculated manner. It must be kept in mind that the data was collected a little less than four decades ago, and much has changed since then.

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Appendix A Table 1: Data Description Variable hrwage lhrwage sleep* sleep hrsleep sqhrsleep slpnaps hrdnaps age sqage othinc spspay ltotothinc female clerical construc selfe gdhlth Description Hourly wage per person, in dollars Log(hrwage) sleep per week at night, in minutes in the population (unobserved) sleep per week at night, in minutes (Self Reported) ; sleep per day at night, in hours (hrsleep) sleep including naps per week (sleep + naps), in minutes ; naps per day, in hours In years (Age)2 Annual income from other source other than spouse pay, in dollars Annual spouse pay, in dollars Log(spouse pay +othinc) =1 if person is female; 0= if person is male 1= if person is a clerical worker; 0= otherwise 1= if person is a construction worker; 0=otherwise 1= if person is self-employed; 0=otherwise 1= if person is in good or excel health; 0= not in good health
2

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Table 2: Regression Table (Dependent variable is log(hrwage)) Equation No. Intercept hrsleep sqsleep hrdnaps age age2 gdhlth ltotinc female clerical construc selfe Total Obs R2 532 0.45% 532 1.01% 532 1.71% 532 4.09% 532 4.57% 2 1.752 -0.208 -0.041 -0.026 3 0.255 -0.893 0.354 -0.231 -0.0257 -0.0149 4 0.317 -0.89 0.344 -0.23 -0.025 -0.015 -0.095 -0.049 5 -0.94 -0.961 0.322 -0.229 -0.023 -0.014 -0.103 -0.048 0.0625 -0.019 -0.0007 -0.0002 0.0673 -0.086 6 -0.906 -0.96 0.3268 -0.229 -0.0233 -0.015 -0.1084 -0.049 0.063 -0.019 -0.0007 -0.0002 0.075 -0.086 -0.011 -0.007 7 -0.505 (0.862) 0.302 (0.206) -0.206 -0.013 -0.102 -0.044 0.054 -0.017 -0.0006 -0.0002 0.0364 -0.078 0.0005 -0.006 -0.577 -0.053 0.032 -0.068 -0.023 -0.143 -0.192 -0.058 532 24.21% 7 (Robust) -0.505 (0.772) 0.302 (0.177) -0.206 -0.011 -0.102 -0.042 0.054 -0.018 -0.0006 -0.0002 0.0364 -0.057 0.0005 -0.006 -0.577 -0.06 0.032 -0.068 -0.023 -0.092 -0.192 -0.132 532 24.21%

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Appendix B Kdensity Curve of hrwage(1a) and lwage(1b) as compared to normal distribution Graph 1a

Kernel density estimate

.2 0 .05 Density .1 .15

10

20 hourly wage Kernel density estimate Normal density

30

40

kernel = epanechnikov, bandwidth = 0.6312

Graph 1b

Kernel density estimate

.8 0
-1

.2

Density .4

.6

1 lwage

Kernel density estimate Normal density

kernel = epanechnikov, bandwidth = 0.1454

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Appendix C 1) Ramsey RESET test using powers of the fitted values of log(wage) of equation () Ho: model has no omitted variables F(3, 516) = Prob > F = 0.53 0.6641

Fail to reject Ho at 5% significance level. It gives no evidence of omitted variable bias.

2) Breusch-Pagan / Cook-Weisberg using the fitted values log(wage) of equation() Ho: Constant variance chi2(1) = 9.20

Prob > chi2 = 0.0024 Ho is rejected at 5% significance level. It gives evidence of heteroskedasticity in the model.

3) Special case of White test using the fitted values log(wage) of equation() Ho: homoskedasticity chi2(68) = 94.95

Prob > chi2 = 0.0171 Ho is rejected at 5% significance level. It gives evidence of heteroskedasticity in the model.

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Works Cited

Better Health Channel. "Sleep Deprivation." Sleep Deprivation. Newcastle Sleep Disorder Centre, 23 Aug. 2011. Web. 30 Dec. 2011. <http://www.betterhealth.vic.gov.au/bhcv2/bhcarticles.nsf/pages/Sleep_deprivation?O penDocument>. Dinges, D. F., F. Pack, and K. Williams. "Cumulative Sleepiness, Mood Disturbance, and Psychomotor Vigilance Performance Decrements during a Week of Sleep Restricted to 45 Hours per Night." Sleep 2.40 (1997): 267-77. Print. Gottselig, J. M., M. Adam, and J. V. Rtey. "Random Number Generation during Sleep Deprivation: Effects of Caffeine on Response Maintenance and Stereotypy." Journal of Sleep Research 15.1 (2006): 31-40. Print. Greg, Mankiw. "How Are Wages and Productivity Related?" Web log post. Greg Mankiw's Blog Random Observations for Students of Economics. 29 Aug. 2006. Web. 29 Dec. 2011. <http://gregmankiw.blogspot.com/2006/08/how-are-wages-and-productivityrelated.html>. Hamermesh, Daniel S., and Jeff E. Biddle. "Sleep and the Allocation of Time." The National Bureau of Economic Research. Journal of Political Economy, Vol. 98, No. 5, Part 1, Oct. 1990. Web. 29 Dec. 2011. <http://www.nber.org/papers/w2988>. Marquie, J. C., J. Foret, and Y. Queinnec. "Effects of Age, Working Hours, and Job Content on Sleep: A Pilot Study." Experimental Aging Research 25.4 (1999): 421-27. Print.

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National Institute of Neurological Disorders and Stroke. "Narcolepsy Fact Sheet." National Institute of Neurological Disorders and Stroke (NINDS). 28 Feb. 2007. Web. 29 Dec. 2011. <http://www.ninds.nih.gov/disorders/narcolepsy/detail_narcolepsy.htm>. Ours, Jan C., and Lenny Stoeldraijer. "Age, Wage and Productivity." (2010). Web. 30 Dec. 2011. Pelham, Brett W. "Rest Eludes Nearly 30% of Americans." (2010). Gallup.Com - Daily News, Polls, Public Opinion on Government, Politics, Economics, Management. Web. 29 Dec. 2011. <http://www.gallup.com/poll/125471/Rest-Eludes-Nearly-Americans.aspx>. Rosekind, Mark R., Kevin B. Gregory, Melissa M. Mallis, Summer L. Brandt, Brian Seal, and Debra Lerner. "The Cost of Poor Sleep: Workplace Productivity Loss and Asso... : Journal of Occupational and Environmental Medicine." Journal of Occupational & Environmental Medicine, Volume 52 - Issue 1 - Pp 91-98, Jan. 2010. Web. 29 Dec. 2011. <http://journals.lww.com/joem/Abstract/2010/01000/The_Cost_of_Poor_Sleep__Work place_Productivity.13.aspx>. Veasey, Sigrid, Raymond Rosen, Barbara Barzansky, Ilene Rosen, and Judith Owens. "Sleep Loss and Fatigue in Residency Training." The Journal of the American Medical Association. Web. 29 Dec. 2011. <http://jama.ama-assn.org/content/288/9/1116.full>. Walker, M. P. "Sleep Deprivation III: Brain Consequences Attention, Concentration and Real Life." Psychology 133. University of California, Berkeley, CA, Berkeley. 21 Oct. 2009. Lecture.

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Wooldridge, Jeffrey M. "Chapter 6." Introductory Econometrics: a Modern Approach. Australia: South-Western College Pub., 2003. Print.

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