Firm Investment, Labor Supply, and the Design of Social Insurance: Evidence from Accommodations for Workplace Injuries
AbstractWork-limiting disabilities have large consequences for health spending and labor market outcomes.
While many factors influence labor market outcomes after the onset of disability, a
relatively unexplored dimension is the role of firms in accommodating workers with disabilities.
This paper studies the impact of firm accommodation decisions on labor market outcomes for
individuals with workplace disabilities, and assesses the implications for optimal social insurance
against workplace disability. Our empirical context is the workers’ compensation program
in the state of Oregon, where we leverage detailed administrative data and a unique policy that
provides wage subsidies to firms that provide workplace accommodation after workplace injury.
We exploit a policy change to the wage subsidy rate to identify the effect of wage subsidy
incentives on accommodation rates, and find that a five percentage point decrease in the wage
subsidy rate led to a substantive decrease in firm accommodation decisions as well as decreases
in longer run employment and earnings outcomes. We then use these estimates to identify
parameters of a dynamic bargaining model between workers and firms in which labor market
frictions, worker turnover, and imperfect experience rating can lead to under-accommodation
and inefficient labor market outcomes after workplace disability. Counterfactual analyses show
that all three of these features lead to under-accommodation, and wage subsidies help correct
these inefficiencies, particularly for workers with low disutility of work during injury and in
imperfectly insured firms. Overall, our findings show that incentives targeted to employers can
have non-trivial effects on the retention of disabled workers in the labor force, and that these
incentives can be a useful tool for correcting otherwise inefficiently low accommodation rates.