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

  • Olivier Marie
  • Judit Vall Castello

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.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1094.

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Date of creation: Nov 2011
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Handle: RePEc:cep:cepdps:dp1094
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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  1. McCrary, Justin, 2008. "Manipulation of the running variable in the regression discontinuity design: A density test," Journal of Econometrics, Elsevier, vol. 142(2), pages 698-714, February.
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  12. Humer, Brigitte & Wuellrich, Jean-Philippe & Zweimüller, Josef, 2007. "Integrating Severely Disabled Individuals into the Labour Market: The Austrian Case," IZA Discussion Papers 2649, Institute for the Study of Labor (IZA).
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  15. Bound, John, 1989. "The Health and Earnings of Rejected Disability Insurance Applicants," American Economic Review, American Economic Association, vol. 79(3), pages 482-503, June.
  16. Richard Blundell & Monica Costa Dias, 2009. "Alternative Approaches to Evaluation in Empirical Microeconomics," Journal of Human Resources, University of Wisconsin Press, vol. 44(3).
  17. Lalive, Rafael & Wuellrich, Jean-Philippe & Zweimüller, Josef, 2009. "Do Financial Incentives for Firms Promote Employment of Disabled Workers? A Regression Discontinuity Approach," CEPR Discussion Papers 7373, C.E.P.R. Discussion Papers.
  18. David H. Autor & Mark G. Duggan & David S. Lyle, 2011. "Battle Scars? The Puzzling Decline in Employment and Rise in Disability Receipt among Vietnam Era Veterans," American Economic Review, American Economic Association, vol. 101(3), pages 339-44, May.
  19. Sergi Jiménez Martín & Judit Vall Castello, 2009. "Business Cycle Effects on Labour Force Transitions for Older People in Spain," Working Papers 2009-25, FEDEA.
  20. Staubli, Stefan, 2011. "The impact of stricter criteria for disability insurance on labor force participation," Journal of Public Economics, Elsevier, vol. 95(9-10), pages 1223-1235, October.
  21. Bell, David N.F. & Heitmueller, Axel, 2005. "The Disability Discrimination Act in the UK: Helping or Hindering Employment Amongst the Disabled?," IZA Discussion Papers 1476, Institute for the Study of Labor (IZA).
  22. David H. Autor & Mark G. Duggan, 2007. "Distinguishing Income from Substitution Effects in Disability Insurance," American Economic Review, American Economic Association, vol. 97(2), pages 119-124, May.
  23. Boyle, Melissa A. & Lahey, Joanna N., 2010. "Health insurance and the labor supply decisions of older workers: Evidence from a U.S. Department of Veterans Affairs expansion," Journal of Public Economics, Elsevier, vol. 94(7-8), pages 467-478, August.
  24. van Ours, J.C., 2006. "Leaving "Hotel California" : How Incentives Affect Flows of Benefit Recipients in the Netherlands," Discussion Paper 2006-116, Tilburg University, Center for Economic Research.
  25. Nicola Duell & Shruti Singh & Peter Tergeist, 2009. "Activation Policies in Norway," OECD Social, Employment and Migration Working Papers 78, OECD Publishing.
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