Can helping the sick hurt the able? Incentives, information and disruption in a disability-related welfare reform
Disability rolls have escalated in developed nations over the last 40 years. The UK, however, stands out because the numbers on these benefits stopped rising when a welfare reform was introduced that integrated disability benefits with unemployment insurance (UI). This policy reform improved job information and sharpened bureaucratic incentives to find jobs for the disabled (relative to those on UI). We exploit the fact that policy was rolled-out quasi-randomly across geographical areas. In the long-run the policy improved the outflows from disability benefits by 6% and had an (insignificant) 1% increase in unemployment outflows. This is consistent with a model where information helps both groups, but bureaucrats were given incentives to shift effort towards helping the disabled find jobs and away from helping the unemployed. Interestingly, in the short-run the policy had a negative impact for both groups, suggesting important disruption effects. We estimate that it takes about six years for the estimated benefits of the reform to exceed its costs, which is beyond the time horizon of most policy-makers.
We would like to thank the ESRC for funding this research through the Centre for Economic Performance Richard Disney, Victor Lavy, Alan Manning, Steve Pischke, Bill Wells and participants at seminars in IFS, LSE, NBER and NIESR have given helpful comments. Barra Roantree generously provided some of the estimates of benefit receipt. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.