Irp Discussion Papers Disability Status as an Unobservable: Estimates from a Structural Model

This paper proposes a new index of "true disability" by trea Hng disability status as an unobservable phenomenon which is both causally related to a number of exogenous characteristics of an individual and correlated with a number of observed indicators of health, impairment and qualifications for employment. First we define true disability and distinguish it from related concepts. We then discuss the importance of an objective and reliable measure of disability for economic research on labor market and other behavior. We then present the specification of our structural model for estimating true disability as a latent variable. Finally, we present the. results of our estimation and compare the constructed index with characteristics believed to be associated with true disability and with a selfreported index of the severity of disability. Disability Status as an Unobservable: Estimates from a Structural Mo~el The true disability status of an individual has important implications for a wide variety of decisions which he or she is required to make. The most prominent of these decisions are whether or not to work, how much to work and the kind of work to do, whether or not to apply for disability-related income transfer benefits, whether or not to seek retraining and rehabilitation services, and the extent of utilization of health care services. Efforts to model and empirically estimate the determinants of these decisions have been plagued by the absence of any reliable and objective indicator of the severity of the disability with which any individual is affected. Those indicators which are readily available are based on three measures: 1. Individual self-reports. These are sUbjective and potentially endogenous, with choices made regarding work that perhaps reflect taste rather than true activity-limiting conditions. 2. Medical reports. These are partial in their evaluation, unrelated to individual labor market potential, and of limited availability. 3. Post-observation mortality. This measure reflects only those physical and mental characteristics associated with individual longevity. All have substantial disadvantages for both behavioral research and s ta tis tical descrip tions of the disabili ty s ta tus of the popula tion. In this paper, we propose a new index, which describes the "true disabili ty" status of an individual. This index trea ts true disability status as an unobservable phenomenon, but one which is both causally L.__ ._. . __. ~ .._. __~ .._. . ._. ~ ~ ._ .. __._