Spousal Labor Supply Responses to Government Programs: Evidence from the Disability Insurance Program

Authors

• Susan Chen

Abstract

Disability is a permanent unexpected shock to labor supply which according to the theory of the added worker effect should induce a large spousal labor supply response. The Disability Insurance (DI) program is designed to mitigate the income lost due to disability. To the extent that it does this, it can crowd out the spousal labor supply response predicted by the added worker effect theory. Using a unique data that matches administrative data combining worker’s earnings histories and disability insurance applications, this study finds that DI crowds out spousal labor force participation by 6 percent and the displacement spans multiple years. The estimated crowd-out effects are also larger for younger wife cohorts and cohorts with particular types of impairments such as musculoskeletal disease.

Key Findings

• Husbands’ Disability Insurance (DI) receipt has a small crowd-out effect on their wives’ labor supply.
• Husbands’ DI receipt crowds out wives’ labor force participation by about 8 percent and earnings by $2,200 for up to 5 years after the disability determination.
• For a sample of wives whose husbands are homogeneous in terms of the severity of their health conditon, the estimates of the crowd-out effects are larger, at 11 percent and $2,600 for labor force participation and earnings. These estimates are an upper bound on the potential labor supply response of the wives of beneficiaries had their husbands not received benefits.

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Project

• UM10-05: The Effect of Disability and Disability Insurance on Spousal Labor Supply

Paper ID

WP 2012-261

Publication Type

Working Paper

Publication Year

2012