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The effect of Disability Insurance receipt on labor supply: a dynamic analysis

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  • Eric French
  • Jae Song

Abstract

This paper estimates the effect of Disability Insurance receipt on labor supply, accounting for the dynamic nature of the application process. Exploiting the effectively random assignment of judges to disability insurance cases, we use instrumental variables to address the fact that those allowed benefits are a selected sample. We find that benefit receipt reduces labor force participation by 26 percentage points three years after a disability determination decision when not considering the dynamic nature of the applications process. OLS estimates are similar to instrumental variables estimates. We also find that over 60% of those denied benefits by an Administrative Law Judge are subsequently allowed benefits within 10 years, showing that most applicants apply, re-apply, and appeal until they get benefits. Next, we estimate a dynamic programming model of optimal labor supply and appeals choices. Consistent with the law, we assume that people cannot work and appeal at the same time. We match labor supply, appeals, and subsequent allowance decisions predicted by the model to the decisions observed in the data. We use the model to predict labor supply responses to benefit denial when there is no option to appeal. We find that if there was no appeals option, those denied benefits are 35 percentage points more likely to work. However, there is considerable heterogeneity in responses. Most individuals in their 40s would return to work if denied benefits, for example. Our results suggest that many of those denied benefits not because they are unable to work, but because they remain out of the labor force in order to appeal their benefit denial.

Suggested Citation

  • Eric French & Jae Song, 2012. "The effect of Disability Insurance receipt on labor supply: a dynamic analysis," Working Paper Series WP-2012-12, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-2012-12
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    References listed on IDEAS

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    1. Philip de Jong & Maarten Lindeboom & Bas van der Klaauw, 2011. "Screening Disability Insurance Applications," Journal of the European Economic Association, European Economic Association, vol. 9(1), pages 106-129, February.
    2. Bound, John & Stinebrickner, Todd & Waidmann, Timothy, 2010. "Health, economic resources and the work decisions of older men," Journal of Econometrics, Elsevier, vol. 156(1), pages 106-129, May.
    3. Bound, John & Burkhauser, Richard V., 1999. "Economic analysis of transfer programs targeted on people with disabilities," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 51, pages 3417-3528 Elsevier.
    4. 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.
    5. Hamish Low & Luigi Pistaferri, 2010. "Disability Risk, Disability Insurance and Life Cycle Behavior," NBER Working Papers 15962, National Bureau of Economic Research, Inc.
    6. Benitez-Silva, Hugo & Buchinsky, Moshe & Chan, Hiu Man & Rust, John & Sheidvasser, Sofia, 1999. "An empirical analysis of the social security disability application, appeal, and award process," Labour Economics, Elsevier, vol. 6(2), pages 147-178, June.
    7. Jerry A. Hausman & Whitney K. Newey & Tiemen Woutersen & John C. Chao & Norman R. Swanson, 2012. "Instrumental variable estimation with heteroskedasticity and many instruments," Quantitative Economics, Econometric Society, vol. 3(2), pages 211-255, July.
    8. James J. Heckman & Sergio Urzua & Edward Vytlacil, 2006. "Understanding Instrumental Variables in Models with Essential Heterogeneity," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 389-432, August.
    9. Nicole Maestas & Kathleen J. Mullen & Alexander Strand, 2013. "Does Disability Insurance Receipt Discourage Work? Using Examiner Assignment to Estimate Causal Effects of SSDI Receipt," American Economic Review, American Economic Association, vol. 103(5), pages 1797-1829, August.
    10. Parsons, Donald O, 1991. "The Health and Earnings of Rejected Disability Insurance Applicants: Comment," American Economic Review, American Economic Association, vol. 81(5), pages 1419-1426, December.
    11. David H. Autor & Mark G. Duggan, 2006. "The Growth in the Social Security Disability Rolls: A Fiscal Crisis Unfolding," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 71-96, Summer.
    12. Bound, John, 1991. "The Health and Earnings of Rejected Disability Insurance Applicants: Reply," American Economic Review, American Economic Association, vol. 81(5), pages 1427-1434, December.
    13. Till von Wachter & Jae Song & Joyce Manchester, 2011. "Trends in Employment and Earnings of Allowed and Rejected Applicants to the Social Security Disability Insurance Program," American Economic Review, American Economic Association, vol. 101(7), pages 3308-3329, December.
    14. Lahiri, Kajal & Song, Jae & Wixon, Bernard, 2008. "A model of Social Security Disability Insurance using matched SIPP/Administrative data," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 4-20, July.
    15. Bjorklund, Anders & Moffitt, Robert, 1987. "The Estimation of Wage Gains and Welfare Gains in Self-selection," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 42-49, February.
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    Cited by:

    1. Laura Dague & Thomas DeLeire & Lindsey Leininger, 2014. "The Effect of Public Insurance Coverage for Childless Adults on Labor Supply," Upjohn Working Papers and Journal Articles 14-213, W.E. Upjohn Institute for Employment Research.
    2. Laura Dague & Thomas DeLeire & Lindsey Leininger, 2017. "The Effect of Public Insurance Coverage for Childless Adults on Labor Supply," American Economic Journal: Economic Policy, American Economic Association, vol. 9(2), pages 124-154, May.
    3. Sudipto Banerjee & David Blau, 2013. "Employment Trends by Age in the United States: Why Are Older Workers Different?," Working Papers wp285, University of Michigan, Michigan Retirement Research Center.

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    Keywords

    Disability insurance ; Labor supply;

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