Labor Market Screening and Social Insurance Program Design for the Disabled
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.
We are grateful to Peter Arcidiacono, Richard Blundell, Eric French, Piero Gottardi, John Kennan, Philipp Kircher, Dirk Krueger, Rasmus Lentz, Ben Lester, Maarten Lindeboom, Jeremy Lise, Joel McMurry, Guido Menzio, Corina Mommaerts, Giuseppe Moscarini, José Víctor Ríos Rull, Yongseok Shin, Dan Silverman, Jon Skinner, Chris Taber, Aleh Tsyvinski, Ronald Wolthoff, and participants at ASSA, Barcelona GSE Summer Forum, Connecticut, Dale T. Mortensen Conference on Labour Markets and Search Frictions, Delaware, Econometric Society Meetings, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Philadelphia, Georgetown/UCL Conference, IZA, GRIPS, KAIST, SNU, KAEA-KEA, NBER Aging and Health, NBER Summer Institute (Macro Perspectives; Macro Public Finance), SAET, SED, Tokyo, and Yale for helpful comments. Any errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.