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Disability Insurance Benefits and Labor Supply

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  • Jonathan Gruber

Abstract

Disability Insurance (DI) is a public program that provides income support to persons unable to continue work due to disability. The difficulty of defining disability, however, has raised the possibility that this program may be subsidizing the early retirement of workers who are not truly disabled. A critical input for assessing the optimal size of the DI program is therefore the elasticity of labor force participation with respect to benefits generosity. Unfortunately, this parameter has been difficult to estimate in the context of the U.S. DI program, since all workers face an identical benefits schedule. I surmount this problem by studying the experience of Canada, which operates two distinct DI programs, for Quebec and the rest of Canada. The latter program raised its benefits by 36% in January, 1987, while benefits were constant in Quebec, providing exogenous variation in benefits generosity across similar workers. I study this relative benefits increase using both simple `difference-in-difference' estimators and more parameterized estimators that exploit the differential impact of this policy change across workers. I find that there was a sizeable labor supply response to the policy change; my central estimates imply an elasticity of labor force non-participation with respect to DI benefits of 0.25 to 0.32. Despite this large labor supply response, simulations suggest that there were welfare gains from this policy change under plausible assumptions about preference parameters.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5866.

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Date of creation: Dec 1996
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Publication status: published as Gruber, Jonathan. "Disability Insurance Benefits And Labor Supply," Journal of Political Economy, 2000, v108(6,Dec), 1162-1183.
Handle: RePEc:nbr:nberwo:5866

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  1. Jonathan Gruber, 1995. "The Incidence of Payroll Taxation: Evidence from Chile," NBER Working Papers 5053, National Bureau of Economic Research, Inc.
  2. Haveman, Robert H & Wolfe, Barbara L, 1984. "The Decline in Male Labor Force Participation: Comment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(3), pages 532-41, June.
  3. Diamond, Peter & Sheshinski, Eytan, 1995. "Economic aspects of optimal disability benefits," Journal of Public Economics, Elsevier, vol. 57(1), pages 1-23, May.
  4. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
  5. Bound, John & Waidmann, Timothy, 1992. "Disability Transfers, Self-Reported Health, and the Labor Force Attachment of Older Men: Evidence from the Historical Record," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(4), pages 1393-419, November.
  6. Jonathan S. Leonard, 1985. "Labor Supply Incentives and Disincentives for the Disabled," NBER Working Papers 1744, National Bureau of Economic Research, Inc.
  7. Jonathan Gruber & Alan B. Krueger, 1990. "The Incidence of Mandated Employer-Provided Insurance: Lessons from Workers' Compensation Insurance," NBER Working Papers 3557, National Bureau of Economic Research, Inc.
  8. Maki, Dennis R, 1993. "The Economic Implications of Disability Insurance in Canada," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 11(1), pages S148-69, January.
  9. David A. Wise & Robin L. Lumsdaine, 1990. "Aging and Labor Force Participation: A Review of Trends and Explanations," NBER Working Papers 3420, National Bureau of Economic Research, Inc.
  10. Parsons, Donald O, 1980. "The Decline in Male Labor Force Participation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 117-34, February.
  11. Don Fullerton, 1989. "If Labor is Inelastic, Are Taxes Still Distorting?," NBER Working Papers 2810, National Bureau of Economic Research, Inc.
  12. Parsons, Donald O, 1991. "The Health and Earnings of Rejected Disability Insurance Applicants: Comment," American Economic Review, American Economic Association, vol. 81(5), pages 1419-26, December.
  13. Summers, Lawrence H, 1989. "Some Simple Economics of Mandated Benefits," American Economic Review, American Economic Association, vol. 79(2), pages 177-83, May.
  14. Parsons, Donald O, 1991. "Self-Screening in Targeted Public Transfer Programs," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(4), pages 859-76, August.
  15. Howard P. Marvel, 1982. "An Economic Analysis of the Operation of Social Security Disability Insurance," Journal of Human Resources, University of Wisconsin Press, vol. 17(3), pages 393-412.
  16. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June.
  17. Jonathan Gruber & Jeffrey D. Kubik, 1994. "Disability Insurance Rejection Rates and the Labor Supply of Older Workers," NBER Working Papers 4941, National Bureau of Economic Research, Inc.
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