Labor Market Screening and Social Insurance Program Design for the Disabled

55 Pages Posted: 24 Aug 2019 Last revised: 25 Jun 2020

See all articles by Naoki Aizawa

Naoki Aizawa

University of Wisconsin - Madison - Department of Economics

Soojin Kim

Purdue University - Department of Economics

Serena Rhee

Chung-Ang University - College of Business & Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 24, 2020

Abstract

This paper studies the optimal design of social insurance programs for disabled workers by developing and estimating an equilibrium labor search model with screening contracts. In the model, firms may strategically use employment contracts, consisting of wage and job amenities, to screen out the disabled. The optimal structure of disability policies depends on firms’ screening incentives, which may distort employment rates and contracts. By exploiting policy changes on the labor demand side for the disabled in the United States, we identify and estimate our equilibrium model to explore the optimal joint design of disability policies, including disability insurance (DI) and subsidies to firms accommodating disabled workers. We find that firm subsidies mitigate screening distortions; at the same time, they interact with DI by reducing the labor supply disincentives it generates. The optimal policy structure leads to a considerable welfare gain by simultaneously making firm subsidies and DI benefits more generous.

Keywords: Disability, Labor Market Screening, Optimal Policy, Social Insurance

JEL Classification: E61, I18, H21, H51, J32

Suggested Citation

Aizawa, Naoki and Kim, Soojin and Rhee, Serena, Labor Market Screening and Social Insurance Program Design for the Disabled (June 24, 2020). Available at SSRN: https://ssrn.com/abstract=3442117 or http://dx.doi.org/10.2139/ssrn.3442117

Naoki Aizawa (Contact Author)

University of Wisconsin - Madison - Department of Economics ( email )

William H. Sewell Social Science Building
1180 Observatory Drive
Madison, WI 53706-1393
United States

Soojin Kim

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

Serena Rhee

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

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

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