Originally published here.

While a large share of Disability Insurance recipients are expected to recover, out-flow rates from temporary disability schemes are typically negligible. We estimatethe disincentive effects of disability benefits on the response to a (mental) healthimprovement using administrative data on all Dutch disability benefit applicants.We compare those below the DI eligibility threshold with those above and find thatdisincentives significantly reduce work resumption after health improves. Approx-imately half of the response to recovery is offset by benefits. Structural laborsupply model estimates suggest disincentive effects are substantially larger whenthe workers earnings capacity is fully restored.

One of the largest social insurance schemes in developed economies is Disability In-surance (DI) (OECD, 2019). In the Netherlands for example, approximately 9% of the working population received disability benefits in 2017 whereas respectively 4%and 4.5% of the working population received unemployment benefits and social assis-tance benefits (CBS, 2019). Total spending on disability benefits amounted to 1.5% of GDP making it the most sizable social insurance scheme in terms of expenditure. Inmost OECD countries, a large share of these expenditures is intended for temporarydisabilities (Pettersson-Lidbom & Thoursie, 2013), of which mental health problemsare one of the main causes.

Even though a large share of those with mental healthproblems are expected to recover (Korpi, 2001), their work resumption rate is typicallylow (Claussen, Bjørndal, & Hjort, 1993; Autor & Duggan, 2006).Despite the stark discrepancy between expected and realized outflow from dis-ability, the vast majority of research on disability insurance has focused on policiestargeting inflow or the use of schemes.

As one of the few studies that considers DIoutflow, we investigate the role of mental health recovery in the return to employ-ment for DI recipients. Comparing DI applicants with disability degrees below andabove the insurance cutoff, we estimate the effect of receiving benefits on the laborsupply response to a positive health shock that is measured by mental health recov-ery. We assess whether disability benefits create disincentives for returning to workonce health improves. Considering all DI applicants in the Netherlands since 2006, weshow that health improvements indeed coincide with an increase in labor supply. Atthe same time, disincentives from receiving benefits do matter, as awarded applicantswith partial disability benefits show weaker labor supply responses than those withoutbenefits.

This paper studies whether labor supply responses to improvements in (mental) healthare partly eliminated by the disincentives of disability benefits. In doing so, we deepenthe understanding of low work resumption rates of DI benefit recipients, particularlyin schemes intended for those deemed temporarily disabled. Applying a Difference-in-Differences (DiD) framework, we compare Dutch DI applicants below the disabilitydegree eligibility threshold as a control group with those above the disability degreethreshold. The control and treatment groups have parallel trends in employmentleading up to recovery, as proxied by the end of mental health treatment. We alsoshow that recovery rates are similar for both groups and we adjust our estimatesfor potential differences-in-health effects. 

Since benefit disincentive effects to resume work after recovery are found to besubstantial, there is a strong case for the continuous screening of the earnings capacityof DI benefit recipients. In the current system, re-examinations of DI benefit recipientsare rare. Continuous screening of DI benefit recipients could identify those that have(partially) recovered, and benefits could be adjusted accordingly. Re-examinationsmay also stimulate re-employment rates by eliminating the ex ante disincentive effectsof benefits.

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