Download This PaperUnderstanding the Aggregate Effects of Disability Insurance
54 Pages Posted: 31 Aug 2018 Last revised: 18 Jun 2021
Date Written: June 17, 2021
Abstract
We study the aggregate consequences of the Social Security Disability Insurance (DI) program, focusing on the role of complementarity between heterogeneous human capital. First, we develop and estimate a wage process in which individuals' human capital comprises (pure) labor and experience, and their efficiencies are affected by disability. We find that older workers are more experience-abundant, and that disability causes a smaller loss in the efficiency of experience than it does in the efficiency of labor. Further, the estimated aggregate production technology shows that labor and experience are complementary inputs. Combining these empirical results with a structural general equilibrium model, we analyze the labor market implications of removing the DI program. Removal of the DI program induces an increase in the relative supply of experience, thus affecting the marginal productivities of inputs and wages of all workers in the economy. Despite the increased labor market entry of disabled workers, the aggregate productivity may increase in the counterfactual economy, thanks to the complementarity between labor and experience.
Keywords: disability insurance, labor supply, wage risk, skill complementarity, human capital
JEL Classification: J31, J24, E24, I18, I38
Suggested Citation: Suggested Citation