IRP Discussion Papers ' - - - - - - - - - - - - - - -

Both policy debate and research have focused on the linkage between the availability and generosity of public disability benefits and the reduction in the work effort of older men. That linkage is the subject of this paper. First, quantitative research in the area is reviewed and the differences in the results are examined. Results differ owing to differences in (1) model specification, (2) the definitions of income opportunities in various options, (3) data bases, and especially (4) the definition of disability or health status that is employed. The effect of the last difference--definition of impairment--is tested, using both self-reported disability and an unobserved variable-structural model estimate of "true" disability. A two-stage probit analysis estimates the effects of disability transfer benefits on labor supply. Estimates using both disability status measures indicate that disability benefits have a statistically significant effect on the work status choice, but the response to increased transfer benefits is small and is concentrated among older, disabled men who have low expected earnings. However, because the estimated response using the self-reported indicator is somewhat greater than that using the index of true disability, endogeneity exists when self-reported disability status is used in studies of labor-supply response, although the extent of bias in estimated results is no t large. Disability Transfers, Health Status, and Economic Behavior An important postwar demographic and economic phenomenon is the significant reduction in the labor force participation rate of older men in many Western industrialized countries. For example, the proportion of u.S. males 45-59 in the labor force fell from 96 to 88.5 percent from 1959 to 1980. As Table 1 indicates, decreases of this magnitude are not unique. While the pattern of the 1968-1978 decreases varies across countries, there is a clear and general tendency for older men of working age to seek alternatives to work. Numerous hypotheses have been suggested to explain this pattern. Labor market opportunities have deteriorated over this period for older workers owing to lagging economic growth and an influx of younger workers; the incidence of work-related impairments may have increased; more working spouses reduce the need for husbands to contribute to household income; tastes for work may have deteriorated; or the availability and generosity of income transfer benefits may have attracted an increasing number of potential beneficiaries out of the work force. It has also been suggested that the public sector, industry, and individual interests have coincided in the judgment that disability pension programs form a desirable vehicle for enabling older, less-productive workers to retire from the work force without deliberate layoffs targeted on them, and without stigma. The time series evidence in Table 1 gives credence to this last hypothesis. The rates of increase in the number of recipients of disability income transfers (column 2) are truly impressive for several of