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Measuring the (Income) Effect of Disability Insurance Generosity on Labour Market Participation

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  • Olivier Marie
  • Judit Vall Castello

Abstract

We analyze the employment effect of a law that provides for a 36 percent increase in the generosity of disability insurance (DI) for claimants who are, as a result of their lack of skills and of the labour market conditions they face, deemed unlikely to find a job. The selection process for treatment is therefore conditional on having a low probability of employment, making evaluation of its effect intrinsically difficult. We exploit the fact that the benefit increase is only available to individuals aged 55 or older, estimating its impact using a regression discontinuity approach. Our first results indicate a large drop in employment for disabled individuals who receive the increase in the benefit. Testing for the linearity of covariates around the eligibility age threshold reveals that the age at which individuals start claiming DI is not continuous: the benefit increase appears to accelerate the entry rate of individuals aged 55 or over. We obtain new estimates excluding this group of claimants, and find that the policy decreases the employment probability by 8 percent. We conclude that the observed DI generosity elasticity of 0.22 on labour market participation is mostly due to income effects since benefit receipt is not work contingent in the system studied.

Suggested Citation

  • Olivier Marie & Judit Vall Castello, 2011. "Measuring the (Income) Effect of Disability Insurance Generosity on Labour Market Participation," CEP Discussion Papers dp1094, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1094
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    More about this item

    Keywords

    Disability insurance; labour market participation; income effect; regression discontinuity;

    JEL classification:

    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J40 - Labor and Demographic Economics - - Particular Labor Markets - - - General

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