Partial disability and labor market adjustment: The case of Spain

Although partially disabled individuals in Spain are allowed to combine disability benefits with a job, the empirical evidence shows that the employment rate of this group of individuals is very low because they have much lower job finding and higher job separation rates than nondisabled workers. Moreover, a decomposition analysis of the equilibrium employment rate shows that the differences in the job finding rates explain 85 percent of the disabled employment gap. To explain these facts, we construct a labor market model with search intensity and matching frictions to identify the incentives and disincentives to work in Spain from the point of view of both disabled workers and employers. According to the model, the high employment rate gap observed between nondisabled and disabled individuals can be partly explained by the presence of a lower level of productivity among disabled individuals that discourages them from looking for jobs. In terms of policy interventions, sensitivity analysis shows that, since the disability condition is permanent, one-off subsidies in new hired positions have a much lower impact on the employment rate and welfare of disabled individuals than long-term policies.