A crucial issue is whether social insurance affects work decisions through income or substitution effects. We examine this in the context of US Social Security Disability Insurance (DI), exploiting discontinuous changes in the benefit formula with a regression kink design to estimate the income effect of payments on earnings and employment. Using administrative data on all new DI beneficiaries from 2001 to 2007, our preferred estimate is that an increase in DI payments of $1 causes an average decrease in beneficiaries' earnings of $0.20 and that annual employment rates decrease by 1.3 percentage points per $1,000 of DI payments. These findings suggest that the income effect accounts for a majority of DI-induced reductions in earnings.
"The Effect of Disability Insurance Payments on Beneficiaries' Earnings."
American Economic Journal: Economic Policy,
Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Social Security and Public Pensions
Economics of the Elderly; Economics of the Handicapped; Non-labor Market Discrimination
Time Allocation and Labor Supply
Wage Level and Structure; Wage Differentials