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Labor Market Screening and Social Insurance Program Design for the Disabled

Author

Listed:
  • Naoki Aizawa

    (University of Wisconsin-Madison)

  • Serena Rhee

    (Korea Development Institute)

  • Soojin Kim

    (Purdue University)

Abstract

Abstract We evaluate social insurance program designs for the disabled by empirically implementing a frictional labor market model with screening employment contracts. In the model, firms post a screening contract consisting of wage and job amenities, and workers with different levels of disability make labor supply decisions. We first theoretically analyze the optimal structure of disability insurance (DI) and firm subsidies for hiring the disabled. Then, by exploiting policy variation in hiring subsidies for the disabled, we empirically examine which job amenities may be used by firms to screen out the disabled, and we structurally estimate our equilibrium model. Using the estimated model, we quantitatively explore the optimal joint design of DI and firm subsidies for employing disabled workers. We find a welfare improving role of firm subsidies that encourage firms to provide more job amenities, mitigating the labor supply disincentives of DI and labor market distortions induced by firms screening contracts. Finally, we show that the presence of a firm's screening incentive significantly affects the effectiveness of the policies: the optimal level of DI should be higher to ameliorate contract distortions caused by the firm's screening activities.

Suggested Citation

  • Naoki Aizawa & Serena Rhee & Soojin Kim, 2019. "Labor Market Screening and Social Insurance Program Design for the Disabled," 2019 Meeting Papers 1551, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1551
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    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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