Friday, November 7, 2014
Santa Ana (Convention Center)
*Names in bold indicate Presenter
The rise in the rolls of public disability insurance and the decline in the labor force participation rate among working-age adults has led to a renewed interest in financial incentives aimed at keeping impaired adults in the labor force. This study examines the potential labor supply response to a Disabled Worker Tax Credit (DWTC) originally proposed in 1996 by the National Academy of Social Insurance. The empirical analysis uses the Survey of Income and Program Participation to examine the change in participation, employment, and hours among impaired adults after three exogenous policy changes: the Earned Income Tax Credit (EITC) expansions of 1991 and 1994 and the creation of the 10 percent tax bracket in 2002. Difference-in-differences estimates indicate no evidence of an increase in labor supply: parents (who are eligible for the EITC) do not increase their labor market activity by more than non-parents. Models that exploit differences in marginal tax rates suggest that labor supply increases when the effective wage increases, but only among impaired individuals who are already employed. These results suggest that the DWTC increase work attachments among impaired workers, but drawing disability beneficiaries and other impaired adults into the labor force would take more than just financial incentives.