1. The Incremental and Collective Effects of Decriminalized and Legal Medicinal
Cannabis on US Labor Force Participation
Eric Stuppard
I. Introduction:
The ever-dwindling stigma associated with marijuana has caused an upheaval of old
legislation that once restricted its use. Despite duplicity of data regarding the beneficial and
detrimental effects of prolonged marijuana use, states have progressively approved several
forms of cannabis legislation; the full legalization of recreational use in Colorado, Oregon,
Alaska, and Washington is one such manifestation of the wavering negative attitude towards
marijuana use. Additionally, it has become increasingly more accessible for medical use – a
trend began with California’s Proposition 215 in 1996, but has since inspired twenty more
states to follow suit by passing their own medical marijuana legislation (MML).
Unfortunately for advocates of marijuana use, it remains nationally illegal on the federal
level. Nonetheless, this topic remains particularly interesting due to its social implications as
people continue to advocate for its legal medicinal and recreational use, but also because of
the potential cognitive impact on the patients who consume it and the general population for
which it is now more accessible. As such, current research is largely dichotomous regarding
the risks and benefits of marijuana use; one study published in the Journal of Clinical
Investigation has shown positive effects of THC (the active chemical in marijuana) on
neurogenesis, a cognitive process by which the brain produces more neurons. These findings
link marijuana use to lower risks of such ailments as Alzheimer’s disease. On the other hand,
a separate study published by the Canadian Medical Association Journal found that
prolonged marijuana use is linked to declining IQ in adults. This conflicting research gives

2. way to discussion regarding the potential economic impact of cannabis legislation; will the
introduction of the marijuana industry bode well for future laborers as more jobs become
available in agriculture and sales? Will the influx of state income allow for greater spending
on the human capital that fuels societal productivity? Or will new legislation pose certain
limits on use and possession that can increase arrest rates, thereby negatively impacting labor
supply while deteriorating the ambition and mental prowess of avid users? This study will
seek to isolate the state-by-state effect on labor force participation brought about by
marijuana legislation; specifically, medicinal approval.
II. Background
Although several studies have found largely insignificant results regarding the passage of
marijuana legislation and use rates, countless others have found the effects of such laws to
manifest differently. However, it is important to first recognize how lucrative the business is.
States that pass any sort of marijuana legislation have seen massive increases in tax revenues;
California, for example, makes upwards of $60 million each year solely on tax revenues from
medical marijuana. While this is a large number, other states such as Colorado, Washington, and
Arizona still rake in over $2 million annually thanks to medical marijuana. These states
unsurprisingly see major returns to human capital. Colorado has devoted $40 million to
construction and improvement of public schools throughout the state. Compare that to the $17.4
billion spent each year on keeping marijuana illegal – including law enforcement, prison
expenditure, and people who would be employed were it not for a marijuana-related arrest – and
it seems almost foolish that states wouldn’t tap into this ever-growing marijuana market. The

3. positive externalities do not stop there, either; Anderson and Rees (2011) sought to isolate the
link between medicinal marijuana legislation and both traffic fatalities and alcohol consumption.
Researchers used a difference-in-difference methodology – using the marijuana law as the
treatment and neighboring states as controls – to determine the true effect of the law on traffic
fatalities and consumption. They not only found that traffic fatalities involving alcohol fall by an
average of 12% per state after the passage of medical marijuana legislation, but beer sales and
alcohol consumption for 20 to 29-year-olds also decreased, thereby suggesting that marijuana is
a substitute for alcohol. The results as a whole would suggest that, since instances of alcohol-
related traffic fatalities and overall consumption have fallen, one can naturally deduce that
instances of DUI arrests have also decreased. This lends weight to the argument that marijuana
legislation could indirectly increase labor force participation by saving lives and reducing arrests.
On the other hand, Holmes (2014) studied the effect of the same type of legislation on
instances of violent crime between 1995 and 2010. Holmes also uses a difference-in-difference
analysis using the law as the treatment and comparing violent and nonviolent crime rates within
states. He finds that the passage of medical marijuana laws increases instances of what he calls
“income-producing crimes,” including theft, robbery, and burglary. This would suggest that after
the passage of marijuana laws, barriers for entry into the market subsequently decrease as
individuals are able to obtain medical cards and sell illegally to those who do not have similar
licensure. Those hoping to enter the market as dealers need only obtain a medical license, after
which they can legally enter dispensaries, buy large amounts of marijuana, and illegally sell it to
non-licensed users or distributors at higher prices. As such, dealers will face increased
competition, and may lose profits as a result, causing them to turn to other forms of crime to
supplement the lost income. Higher instances of crime undoubtedly hurt the labor market, as

4. individuals who could once go out and find work are either behind bars serving time or having
more trouble finding work due to criminal history that resulted from greater instances of crime.
Further research on the laws’ effects on arrest rates was conducted by Yu-Wei Chu (2012), who
also tested whether or not such laws increased overall usage of marijuana. She collected data for
several cities on the number of arrests for marijuana possession from 1988-2008, a period during
which numerous states passed some form of marijuana legislation. Chu found that treatment
referrals for medical marijuana increased by 10% for adult males; moreover, for this same group,
arrest rates increased by 20%. This could have major implications for large-scale labor markets,
especially if adult males tend to make up the majority of the market. More frequent arrests once
again suggest that there will not only be fewer available workers, but fewer firms willing to hire
individuals who have an arrest record.
The purpose of this study will be to fully isolate the effect of medical marijuana
legislation on the real labor force participation, state by state. I will use a loose difference-in-
difference analytical framework – using the passage of the law as a treatment – in order to isolate
its influence on changes in labor force participation. Furthermore, I will use state and time fixed
effects in order to control for extraneous factors within states that are more difficult to quantify
(strength of law enforcement, prevalence of marijuana culture, etc.). Since fixed effects typically
measure time-invariant characteristics, I will include median household income for each state in
order to capture other factors that may not only be affected by the passage of the law, but may
also have an effect on the labor force participation. By including this in my analysis, I can try
and control for collective income effects; for instance, if a certain state has a growing average
per capita income over a given period, this may negatively affect labor force participation if
people are choosing to work fewer hours as they earn more income. Conversely, if per capita

5. income is falling, people may choose to work more in order to supplement lower returns to
employment, resulting in higher labor force participation. Furthermore, one can assume that
states with high median income tend to have higher-functioning political systems in place that
allow for the easy passage of controversial laws, and states with higher income may therefore be
more likely to pass an MML that can further contribute to their well-being. In this way, state
median income is a signal of their political health; competent policymakers will carry out
decisions that will benefit the greater population, and will allocate monetary resources to
ameliorate living much wiser than would low-income states.
III. The Model
I will be running a fixed-effects regression using panel data I gathered on all 50 states and
Washington, DC from 1984 to 2015. For each region, I recorded its labor force participation
(percent of eligible labor force currently employed), median income, and whether or not it has
medical marijuana legislation for that year (as a dummy variable).
Table 1: Summary statistics
Observations Mean Std. Dev. Min Max
State 1550 N/A N/A N/A N/A
Year 1550 N/A N/A N/A N/A
Law 1550 N/A N/A N/A N/A
Labor Force Participation 1550 62.84% 4.57% 44.40% 73.00%
Median Income 1550 $53,659.91 $8,826.34 $32,867 $79,915

6. Since the passage of the law and the prevalence of marijuana use from state to state is very much
a reflection of the unquantifiable marijuana culture, I used state and time-fixed effects to control
for the unobservable. The final regression equation is as follows:
𝐿𝐹𝑃𝑖𝑡 = 𝛽0 + 𝛽1 𝐿𝑎𝑤𝑖𝑡 + 𝛽2 𝑀𝑒𝑑𝑖𝑎𝑛 𝐼𝑛𝑐𝑜𝑚𝑒𝑖𝑡 + 𝛾𝑖 + 𝛿 𝑡 + 𝜀𝑖
Where LFPit is the labor force participation for a given state at a given time, β1 is a dummy
variable notating whether or not a given state has a medical marijuana law in place, β2 is the log
median household income for a given state at a given time, γi is a state fixed-effect, and δt is the
time fixed-effect. Each state and each year will essentially act as its own control variable,
thereby controlling for many subjective, time-invariant factors. Household income has been
included to account for potential influences on labor force participation that vary over time and
are not captured in state or time fixed effects. Additionally, I wanted to test whether or not
passing an MML would take some time to manifest a true effect on labor force participation.
Thus, I included a lag on the Law variable for two of my regressions: one with a two-year lag,
and another with a five-year lag. I predict a resulting increase in labor force participation not
only because jobs will open up in the marijuana industry, but also based on the fact that the tax
revenues from regulated marijuana sales will allow for increased state spending on improving
human capital, which will undoubtedly affect the labor force participation even further across all
industries if more people are educated and therefore skilled enough to find work.
IV. Results and Discussion
In all three instances, the coefficients associated with the law and the log income were
significant and robust. The passage of the law appeared to have a negative effect on labor force

7. participation, which falls by 0.5% to 0.7% after the law is passed. The income coefficients, on
the other hand, are all positive, suggesting that income rises by up to 12% when labor force
participation increases by 1%.
Table 2: Regression results
These results suggest that labor force participation is negative influenced by the passage of a
law. One may think that this is because people are becoming less productive; on the other hand,
given the major revenues associated with passing marijuana legislation, this could also be
evidence of a statewide income effect. If a given state experiences huge financial returns to
passing MMLs, then they will presumably make efforts to improve the living conditions of its
citizens through greater investment in human capital (schools, hospitals, roads, law enforcement,
etc.). In this way, as a society becomes better off, the average income naturally increases; the
average citizen – now making more money than before – may choose to work fewer hours, since
the marginal amount he or she earns from working has increased. So, while a state may become
ostensibly less productive, its citizens may be experiencing greater returns to their work hours
VARIABLES No lag 2-year lag 5-year lag
Law -0.771*** -0.741*** -0.556***
(0.137) (0.141) (0.149)
Log(income) 12.58*** 12.64*** 11.91***
(0.594) (0.601) (0.591)
Constant -76.07*** -76.78*** -69.13***
(6.493) (6.568) (6.450)
Observations 1,550 1,450 1,300
R-squared 0.720 0.728 0.767

8. and could choose to forego some of those hours. Additionally, the law coefficient moves towards
0 as the lag increases. This means that over time, the effect of the MML on labor force
participation deteriorates as the state economy becomes accustomed to the immense annual
revenue from regulated marijuana. This might also signify that since the state is much better off,
the cost of living will undoubtedly increase as peoples’ changing demands begin to reflect more
lavish lifestyles. These greater living expenses will drive people to work more hours, thereby
increasing labor force participation. Another possibility is that with a stronger economy, more
people will begin looking for work, thereby entering the labor force; this is especially true for
occupations in the marijuana industry, including agriculture, distribution, and retail. This influx
of individuals into the labor market will negatively skew labor force participation until those
people can find jobs. As the marijuana market expands over the years, it will become able to
accommodate more people looking for work. In this way, the labor demand will catch up to the
higher labor supply, and the labor market will move towards equilibrium as labor force
participation normalizes.
V. Conclusion
The purpose of the current study was to isolate an effect of medical marijuana legislation on
labor force participation. Previous research was dichotomous regarding any preliminary effects
to be gleaned. However, results from the current study suggest that while labor force
participation does initially decrease when a state passes an MML, this decrease is largely due to
the growth of industry rather than declining productivity greater instances of arrest. As such, any
society would benefit from passing marijuana legislation due to its positive effects on labor

9. supply, state income, and human capital. Future research would benefit from including more
explanatory variables – such as expenditure on education – in order to observe other factors that
may be at play.

10. References
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