IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp12136.html
   My bibliography  Save this paper

Adjustment Costs and Incentives to Work: Evidence from a Disability Insurance Program

Author

Listed:
  • Zaresani, Arezou

    () (Melbourne Institute of Applied Economic and Social Research)

Abstract

How important are adjustment costs for individuals when they face a change in work incentives induced by a policy change? I provide the first estimate of heterogeneous adjustment costs by exploiting a policy change that substantially increased work incentives. The policy change increased the exemption threshold in a disability insurance program. I document strong responses to work incentives as I observe excess mass –"bunching"– right below the exemption threshold where the marginal tax on earnings is low. A puzzling observation is that individuals continue bunching at the former threshold after the policy change. This finding suggests that they face adjustment costs when changing their labor supply. I use the amount of bunching at the new and former threshold to estimate adjustment costs that vary by individuals' ability to work. The estimated adjustment costs are higher for individuals with lower ability; varying from zero to twenty percent of their potential earnings, with an average at eight percent. The estimated elasticity of earnings respect to net-of-tax rate – accounting for heterogeneous adjustment costs – is 0.2, which is double the size of the elasticity estimated with no adjustment costs. To investigate the relative size of the adjustment costs to the work incentives induced by the policy change, I evaluate the overall effect of the policy change on the labor supply using a Difference-in-Differences design. I find that individuals who already work, work more, and those who did not work, start working. Policies designed to increase labor supply will work if the induced work incentives are large enough to offset the adjustment costs. Accounting for adjustment costs then might explain disparate findings on the effects of an increase in work incentives on labor supply in disability insurance programs. These findings have important implications for designing policies and targeting heterogeneous groups to increase labor supply in disability insurance programs.

Suggested Citation

  • Zaresani, Arezou, 2019. "Adjustment Costs and Incentives to Work: Evidence from a Disability Insurance Program," IZA Discussion Papers 12136, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp12136
    as

    Download full text from publisher

    File URL: http://ftp.iza.org/dp12136.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Monika Bütler & Eva Deuchert & Michael Lechner & Stefan Staubli & Petra Thiemann, 2015. "Financial work incentives for disability benefit recipients: lessons from a randomised field experiment," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-18, December.
    2. Bastani, Spencer & Selin, Håkan, 2014. "Bunching and non-bunching at kink points of the Swedish tax schedule," Journal of Public Economics, Elsevier, vol. 109(C), pages 36-49.
    3. Philippe Aghion & Ufuk Akcigit & Matthieu Lequien & Stefanie Stantcheva, 2017. "Tax Simplicity and Heterogeneous Learning," NBER Working Papers 24049, National Bureau of Economic Research, Inc.
    4. Campolieti, Michele & Riddell, Chris, 2012. "Disability policy and the labor market: Evidence from a natural experiment in Canada, 1998–2006," Journal of Public Economics, Elsevier, vol. 96(3), pages 306-316.
    5. Tazhitdinova, Alisa, 2015. "Adjust Me if I Can’t: The Effect of Firm Incentives on Labor Supply Responses to Taxes," MPRA Paper 81611, University Library of Munich, Germany, revised 2017.
    6. Ronald Kneebone & Oksana Grynishak, 2011. "Income Support for Persons with Disabilities," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 4(11), September.
    7. Hoynes, Hilary Williamson & Moffitt, Robert, 1999. "Tax Rates and Work Incentives in the Social Security Disability Insurance Program: Current Law and Alternative Reforms," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(4), pages 623-654, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chiara Dal Bianco, 2019. "Labour Supply and Welfare Effects of Disability Insurance: A Survey," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 5(1), pages 161-189, March.

    More about this item

    Keywords

    adjustment costs; bunching; kink; elasticity; disability insurance;

    JEL classification:

    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp12136. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Holger Hinte). General contact details of provider: http://www.iza.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.