NBER Disability Research Center

NB13-6, How Financial Incentives Induce Disability Insurance Recipients to Return to Work

Magne Mogstad, University College, London
Andreas Kostol, Statistics Norway

Disability Insurance (DI) programs have long been criticized by economists for their work disincentives. Some countries have recently modified their program so that DI recipients are allowed to keep some of their benefits if they return to work and other countries are considering similar return-to-work policies. One example is the proposed change in the DI program in the U.S., known as the ‘$1 for $2 offset’. Under this policy, a DI recipient’s benefits would be reduced by $1 for every $2 of the person’s earnings above the substantial gainful activity (SGA) threshold. However, the evidence base for such return-to-work policies for DI recipients is scarce. Using a local randomized experiment that arises from a sharp discontinuity in DI policy in Norway, the proposed project will provide transparent and credible identification of how financial incentives induce DI recipients to return to work. The results will help understand whether many individuals who are deemed totally and permanently disabled indeed have the capacity and how elastic their labor supply is to changes in financial incentives.