Disability Insurance Benefits and Labor Supply Decisions: Evidence from a Discontinuity in Benefit Awards

This paper explores the effects of disability insurance (DI) benefits on the labor market decision of existing DI beneficiaries using data from the Swiss Household Panel. We use a fuzzy regression discontinuity (RD) design to identify the effect of DI benefits on the decision of working full-time, part-time or staying out of the labor force by exploiting a discontinuity in the DI benefit award rate. Overall, our results suggest that the Swiss DI system creates substantial lock-in effects which heavily influence the working decision of existing beneficiaries: the benefit receipt increases the probability of working part-time by about 41%-points, decreases the probability of working full-time by about 42%-points but has little or no effects on the probability of staying out of the labor force for the average beneficiary. Therefore, DI benefits induce a shift in the labor supply of existing beneficiaries in the sense that they reduce their work intensity from working full-time to part-time adding a possible explanation for the low DI outflow across the OECD