Take-up and labor supply responses to disability insurance earnings limits

Abstract

The paper found that: (1) The decrease in the earnings limit had a small impact on selection into the program. First, we do not find evidence of decreased program entry rates. Second, consistent with the screening mechanism, we show that individuals who entered the program after the reform (new entrants) had worse pre-entry labor market outcomes than beneficiaries who had entered earlier (old entrants). Though new entrants were slightly less likely to work and earned somewhat less on average pre-entry than old entrants, old and new entrants were similar on a variety of dimensions, such as age, occupation, geographical location, and sick leave use prior to entering disability. (2) Individuals who entered the program after the earnings limit was reduced had meaningfully lower labor supply post-entry. New entrants were as likely to be employed as old entrants, but conditional on being employed, they worked less. On average, new entrants worked 7 percent fewer hours, and had 18 percent lower earnings (conditional on working) after taking up benefits. (3) This result is driven by the beneficiaries with higher pre-disability earnings, who were most affected by the change in the earnings limit.