Labour supply responses to reducing the risk of losing disability insurance benefits

Abstract

We study whether disability insurance (DI) recipients increase their labour supply after the introduction of an automatic reinstatement policy, i.e. a programme mitigating the risk of losing eligibility for DI benefits due to a trial period of substantially increased work. We use Finnish administrative data and identify the effect of the policy on partial DI recipients by using partial DI applicants whose application was rejected as a control group. Partial DI recipients by definition have substantial remaining work capacity and are therefore potentially more responsive to programmes affecting work incentives than full DI benefit recipients. The rejected individuals have similar work histories, health impairments and remaining work capacity to those who are allowed benefits, enabling us to estimate the effects of automatic reinstatement on labour supply with a credible control group. Based on our estimation results, automatic reinstatement of benefits increases annual earnings modestly, but for those with mental disorders the effect is larger.