The influence of economic incentives on reported disability status

Self-reported disability status is often relied upon in labour force participation models, but this may be reported with error for economic or psychological reasons and can lead to a bias in the effect of disability on participation. In this paper, we explore the possibility that reported limitations in daily activities are mis-reported, in particular for those who define their labour force status as disabled/ill, and assess if economic incentives influence this group to mis-report. The main questions we wish to address therefore are: (1) was there state-dependent reporting error and did economic incentives play a role, and (2) did this change over the years 1995-2001? Using a generalised ordered response model, we compute cleansed measures of disability that correspond to predicted responses individuals would have made if employed. Unobserved differences between the employed and non-employed may exist; therefore, we control for this via correlated random effects. The results indicate that the disabled/ill group did over-report and the difference between actual and predicted probabilities only marginally changed between 1995 and 2001. The extent of this measurement error is lower once we control for unobserved heterogeneity.