Panel Paper: The Effect of Disability Insurance Receipt On Labor Supply

Friday, November 9, 2012 : 8:00 AM
Washington (Sheraton Baltimore City Center Hotel)

*Names in bold indicate Presenter

Eric French, Federal Reserve Bank of Chicago and Jae Song, Social Security Administration

This paper estimates the effect of Disability Insurance receipt on labor supply. 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 sam-

ple. We find that benefit receipt reduces labor force participation by 26 percentage points

three years after a disability determination decision, although the reduction is smaller for

those over age 55, college graduates, and those with mental illness. 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 pre-

dicted 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 43 percentage points more likely

to work. 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.

Full Paper: