Work

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

Year: 2025

Type: article

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 above an individual earnings threshold. Using Finnish administrative data, we identify the policy's impact on partial DI recipients by comparing them to rejected applicants with similar work histories, health impairments and work capacities. Based on our estimation results, automatic reinstatement of benefits may increase working among specific subgroups, but on average is not effective in increasing labour supply. To complement our empirical analysis, we model the perceived risk of losing eligibility for DI benefits as a type of adjustment friction in the institutional context where the budget set includes a notch, and use behavioural elasticity estimates from earlier literature to study the role of financial incentives. Counterfactual simulations reveal that financial incentives play a significant role in the effectiveness of automatic reinstatement of benefits, highlighting the interplay between financial and non‐financial aspects of the DI system.

Source: Economica

DOI: 10.1111/ecca.70005

Authors: Tuuli Paukkeri, Terhi Ravaska

Institutions: VATT Institute for Economic Research, Tampere University

Language: English

Topic: Retirement, Disability, and Employment

Subfield: Demography

Field: Social Sciences

Domain: Social Sciences

SDGs: Decent work and economic growth, No poverty, Good health and well-being

Open Access status: hybrid

Estimated APC paid: $3,400