Panel Paper: An Empirical Analysis of Unemployment Duration and Disability Application Decisions

Thursday, November 8, 2012 : 3:20 PM
Washington (Sheraton Baltimore City Center Hotel)

*Names in bold indicate Presenter

Hugo Benitez-Silva, SUNY-Stony Brook and Na Yin, Baruch College

The aim of this research is to examine how the health of applicants to the Social Security Disability Insurance (DI) program varies over the business cycle, in particular during the most recent economic recession, and to examine changes in the decision to apply and the timing of application of the different pools of applicants in this recessionary period.

The 2007-09 economic recession resulted in the highest national unemployment rate in nearly 30 years, and the duration of unemployment also reached record highs. Disabled workers are typically hit harder by labor market volatility than other groups of workers, and between 2008 and 2010 job losses among workers with disabilities far exceeded those of workers without disabilities (Kaye, 2010). During, and immediately following the recession, applications to the DI program rose significantly. The number of applicants reached a record high of 2.93 million in 2010, and it was still above 2.87 million in 2011, with more than a million awardees in each of those years, further straining a program that faced financing challenges even before the recession.

Previous studies demonstrate that the propensity to apply for disability benefits rises in the economic downturns and falls in good economic times. Individuals suffering from severe health limitations are expected to apply for disability soon after the onset of the disability, regardless of labor market conditions. However, individuals with less severe health limitations who may be considered “marginal” applicants may be more sensitive to labor market conditions. If job prospects are plenty, or individuals are optimistic about future job prospects, marginal applicants would wait longer to apply for DI, perhaps relying on other government programs such as unemployment insurance. When job prospects are dim, they may choose to apply for DI sooner. Preliminary evidence from the Health and Retirement Study shows that during the recession, more applicants to the disability program report excellent, very good health and good health compared to the years before the recession, and fewer applicants report fair and poor health. This suggests that the composition of DI applicants has changed with the recession, which we expect will also result in shifts in the timing of applications.   

Understanding how the pool of disability applicants changes over the business cycle is crucial in order to study the best mix of policies in consideration of several objectives. These include keeping workers with health limitations in the labor market, and protecting them during recessions in order to reduce their incentives to apply to DI program. Withdrawal from the labor force causes a loss of workers’ human capital and results in aggravation of the budgetary pressures on the program by both increasing current benefit payments and reducing future contributions by these workers through their payroll taxes. If recessions push workers with the capacity to work onto the disability rolls prematurely, it will have long term consequences for workers, the economy, and will further strain the federal budget.