The use of subjective health measures in empirical models of labour supply and retirement decisions has frequently been criticized. Responses to questions concerning health may be biased due to financial incentives and the willingness to conform to social rules. The eligibility conditions for some social security allowances, notably Disability Insurance benefits, are contingent upon bad health. Even if the decision to apply for a disability allowance is to some extent motivated by financial considerations or a relatively strong preference for leisure, respondents will be inclined to play down these motives and emphasize the importance of their health condition. As a consequence, reporting errors may depend on the labour market status of the respondent and self-reported health variables will be endogenous in labour supply and retirement models. The objective of this paper is to assess the importance of state dependent reporting errors in survey responses and to propose and estimate a model that can be used to account for this kind of systematic mis-reporting. The estimation results indicate that among respondents receiving Disability Allowance, reporting errors are large and systematic. Using such subjective health measures in retirement models may therefore seriously bias the parameter estimates and the conclusions drawn from these.
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