Cluster-Seminar Public Finances and Living Conditions

We study the incentive and labor market effects of disability benefit programs using unique policy variation in Germany. In 2014, disability benefits of new recipients were increased considerably while eligibility criteria were not changed. We exploit this quasi-experimental policy variation to test the implications at two different margins. First, we analyze to what extent an increase in the benefit level leads to selection effects and increases the number of recipients. Second, we quantify the wealth effect of disability benefits on labor market outcomes by estimating labor supply responses of individuals receiving disability benefits. The analyses are based on high-quality administrative data from the German pension insurance. We combine information on employment biographies from a 1-2% sample of the insured population and the universe of new disability benefits recipients from the years 2013-2015. We estimate a fixed effects model to identify the effect on entries into disability pensions. For the labor supply responses of beneficiaries, we apply an event study design. Results show that the reform did not increase enrollment for disability benefits. For benefit recipients, however, we find that an increase in pension wealth leads to negative employment effects.