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The Effect of Disability Insurance Payments on Beneficiaries' Earnings

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  • Alexander Gelber
  • Timothy J. Moore
  • Alexander Strand

Abstract

A crucial issue is whether social insurance affects work decisions through income or substitution effects. We examine this in the context of US Social Security Disability Insurance (DI), exploiting discontinuous changes in the benefit formula with a regression kink design to estimate the income effect of payments on earnings and employment. Using administrative data on all new DI beneficiaries from 2001 to 2007, our preferred estimate is that an increase in DI payments of $1 causes an average decrease in beneficiaries' earnings of $0.20 and that annual employment rates decrease by 1.3 percentage points per $1,000 of DI payments. These findings suggest that the income effect accounts for a majority of DI-induced reductions in earnings.

Suggested Citation

  • Alexander Gelber & Timothy J. Moore & Alexander Strand, 2017. "The Effect of Disability Insurance Payments on Beneficiaries' Earnings," American Economic Journal: Economic Policy, American Economic Association, vol. 9(3), pages 229-261, August.
  • Handle: RePEc:aea:aejpol:v:9:y:2017:i:3:p:229-61
    Note: DOI: 10.1257/pol.20160014
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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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