Saturday, April 20, 2013

Disability benefits and the labor market

Great in-depth WSJ analysis last week about the growing percentage of the labor force going on disability.  Originally designed to protect employees who have suffered severe injuries or illnesses that preclude them from working, the eligibility criteria were widened in 1984 "to place greater weight on applicants’ own assessments of their disability, especially when it came to pain and discomfort; to replace the government’s medical assessments with those of the applicants’ own doctors; and to loosen the screening criteria for mental illness, among other things."

Historically, workers are much more likely to apply for disability during recessions.  In December 2007 there were 7.1m workers on disability, which increased to 7.6m at the "official" end of the recession in June 2009 and to 8.9m in March 2013.  The ratio of those receiving disability to the size of the adult labor force (employed plus unemployed) rose from 1.7% in 1970 to 5.4% in March 2013, despite significant improvements in health and workplace safety. 

The benefits are far from generous, averaging $13,650 per year.  But combined with other social insurance programs, the payoff to searching for work appears to be quite modest.  In 2011, only 0.5% of beneficiaries got jobs.  Assuming this pattern continues, we should not count on very many of those who lost their jobs in the recession and ended up on disability to return to the labor force. 

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