Do disability benefits hinder work resumption after recovery?

Area of Science:

• Health Economics
• Labor Economics
• Social Policy

Background:

• Many Disability Insurance (DI) recipients are expected to recover.
• Temporary DI schemes often have negligible outflow rates.
• Understanding factors influencing work resumption is crucial for social security systems.

Purpose of the Study:

• To estimate the disincentive effects of disability benefits on work resumption following health improvements.
• To quantify how DI benefits impact the response to recovery.
• To analyze the role of earnings capacity in these disincentive effects.

Main Methods:

• Utilized administrative data on all Dutch disability benefit applicants.
• Compared individuals below and above the DI eligibility threshold.
• Employed a structural labor supply model to estimate disincentive effects.

Main Results:

• Disability benefits significantly reduce work resumption after health improves.
• Approximately 50% of the response to recovery is offset by benefit disincentives.
• Disincentive effects are substantially larger when a worker's earnings capacity is fully restored.

Conclusions:

• Disability benefit schemes can create significant disincentives for work resumption.
• Policy interventions may be needed to mitigate these effects and encourage return to work.
• The design of DI benefits should consider the impact on labor supply when health status improves.