Understanding the Aggregate Effects of Disability Insurance

51 Pages Posted: 31 Aug 2018 Last revised: 5 May 2020

See all articles by Soojin Kim

Soojin Kim

Purdue University - Department of Economics

Serena Rhee

Chung-Ang University - College of Business & Economics

Date Written: April 23, 2020

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 is composed of (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 products of inputs and wages of all workers in the economy. While the entry of less productive workers lowers the average productivity of the workforce, its negative effect is limited because of the complementarities between labor and experience.

Keywords: disability insurance, labor supply, wage risk, skill complementarity, human capital

JEL Classification: J31, J24, E24, I18, I38

Suggested Citation

Kim, Soojin and Rhee, Serena, Understanding the Aggregate Effects of Disability Insurance (April 23, 2020). Available at SSRN: https://ssrn.com/abstract=3236889 or http://dx.doi.org/10.2139/ssrn.3236889

Soojin Kim

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

Serena Rhee (Contact Author)

Chung-Ang University - College of Business & Economics ( email )

84 Heukseok-ro
Dongjak-gu
Seoul, 06724
Korea, Republic of (South Korea)

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