Disability Insurance Bene�ts and Labor Supply

A critical input for assessing the optimal size of disability insurance programs is the elasticity of labor force participation with respect to the generosity of benefits. Unfortunately, this parameter has been difficult to estimate in the context of the U.S. disability insurance program since all workers face an identical benefits schedule. I sur-mount this problem by studying the experience of Canada, which operates two distinct disability insurance programs: for Quebec and for the rest of Canada. The latter program raised its benefits by 36 percent in January 1987, whereas benefits in Quebec were constant. I find a sizable labor supply response to the policy change; my central estimates imply an elasticity of labor force nonparticipation with re-spect to disability insurance benefits of 0.28–0.36. One of the largest social insurance programs throughout the developed world is disability insurance. In the United States, the disability insurance program has over 6 million beneficiaries and benefit payments of almos