Summary

In most incapacity insurance coverage applications, beneficiaries lose some or all of their advantages in the event that they earn above an earnings threshold.  Whereas supposed to display out candidates with excessive remaining working capability, earnings limits can even distort the labor provide of beneficiaries.  We develop a easy framework to guage this trade-off.

We use a discount within the earnings restrict in Hungary to look at screening and labor provide responses and analyze administrative panel information that brings collectively info on earnings, occupations, profit receipt, healthcare spending, and different domains for half of the Hungarian inhabitants over the 2003-2017 interval.

To check how the reform impacted the choice of beneficiaries into the Common Social Help (RSA) program and their labor provide conditional on participation, we evaluate beneficiaries who entered in 2007, the yr earlier than the reform (“outdated entrants”), and beneficiaries who entered in 2008, the yr after the reform (“new entrants”).  We observe these two teams of beneficiaries for 4 years earlier than and three years after they enter incapacity insurance coverage.  We begin our empirical evaluation by evaluating choice into the RSA program between outdated and new entrants.  Specifically, we evaluate program influx, noticed traits of entrants and their labor market outcomes within the years earlier than entry.  This evaluation ought to give us a great sense of the general choice impact because of the reform.  Subsequent, we evaluate labor market outcomes of outdated and new entrants after incapacity entry.  To interpret these variations as labor provide results from the change within the earnings restrict, we’ve got to manage for the choice results, which we do in regression and reweighting analyses.

We discover that the coverage modified choice into this system modestly however decreased labor provide considerably.  Considered via the lens of our mannequin, these findings counsel that the earnings threshold may very well be larger.

A limitation of our evaluation lies in its comparability with different incapacity applications, on condition that the Hungarian RSA program presents a really low, flat-rate profit particularly designed for reasonably disabled people.  Nonetheless, our outcomes result in a basic conclusion that the low earnings restrict discourages beneficiaries from absolutely using their remaining working capability.

The paper discovered that:

• The lower within the earnings restrict had a small impression on choice into this system.  First, we don’t discover proof of decreased program entry charges.  Second, in keeping with the screening mechanism, we present that people who entered this system after the reform (new entrants) had worse pre-entry labor market outcomes than beneficiaries who had entered earlier (outdated entrants).  Although new entrants had been barely much less more likely to work and earned considerably much less on common pre-entry than outdated entrants,  outdated and new entrants had been comparable on quite a lot of dimensions, equivalent to age, occupation, geographical location, and sick depart use previous to getting into incapacity.
• People who entered this system after the earnings restrict was decreased had meaningfully decrease labor provide post-entry.  New entrants had been as more likely to be employed as outdated entrants, however conditional on being employed, they labored much less.  On common, new entrants labored 7 % fewer hours, and had 18 % decrease earnings (conditional on working) after taking over advantages.
• This result’s pushed by the beneficiaries with larger pre-disability earnings, who had been most affected by the change within the earnings restrict.

The coverage implications of the findings are:

• We present conceptually that with the selection of the earnings restrict, policymakers should commerce off choice and labor provide results.
• Our outcomes counsel that reducing the earnings restrict solely led to a reasonable enchancment in screening effectivity.  This proof is in keeping with a situation the place the earnings restrict and profit stage earlier than the reform had been already sufficiently low to discourage potential entrants who’re well-positioned to seek out higher-paying jobs within the labor market.
• On the similar time, the reform considerably distorted the labor provide of program members, indicating that people with reasonable disabilities react sensitively to the monetary incentives embedded in incapacity advantages.
• Too-strict earnings limits fail to yield sizable price financial savings from profit expenditures for the federal government however depart reasonably disabled people with decrease earnings, leading to decrease tax revenues.