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

The effect of disability insurance (DI) benefits on the labor supply of individuals is a disputed topic in both academia and policy. We identify the impact of DI benefits on working full-time, part-time or being out of the labor force by exploiting a discontinuity in the DI benefit award rate in Switzerland above the age of 55. Using rich survey data, we find that a DI benefit receipt increases the probability of working part-time by about 32%-points, decreases the probability of working full-time by about 35%-points, but has little or no effect on the probability of being out of the labor force for the average beneficiary. We find evidence for substantial effect heterogeneity with men more likely adjusting their labor supply from working full-time to part-time, whereas women tend to drop out of the labor market. At the same time, while middle- to high-income and relatively healthy DI beneficiaries are more likely to switch from full-time to part-time employment, low-income and very ill people tend to drop out of the labor force entirely. Our results shed new light on the mechanisms explaining low DI outflow rates and may help to better target interventions