Wednesday, February 22, 2012

Disability insurance and labor supply

Alex Tabarrok highlights the relationship between unemployment insurance benefit exhaustion and disability insurance applications. Essentially, disability insurance in this country is used as a way of extending other social insurance programs.

This is not a new finding. In fact, the first person I know of to point this strategic utilization of disability insurance out was my labor economics professor at GW, Donald Parsons. Parsons had two papers on the issue in 1980. His AER paper determined that going on disability was a major determinant of the decline in the labor supply of black males. His JPE paper of the same year found similar results for the decline in labor supply of older males.

Since I've been blogging a lot about Hoover lately, I'll make a very Hooveresque point on all this: if we aren't able to generate jobs for people going through hardship, they're going to go on whatever relief is available. This is a very real problem. This was not the purpose of disability insurance. One way to solve this problem is to crack down on applicants - and perhaps some resources ought to be put into this solution. But that seems to miss the forest for the trees to me. A better solution is to implement policies that will actually help the labor market generate more jobs.

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