Irp Discussion Papers Disability Transfers and Early Retirement: a Causal Relationship?

During the decade 1968-1978, the labor force participation rate of older male workers decreased substantially. Simultaneously, the number of recipients of disability transfers grew rapidly. The simultaneous movement of these time series has prompted assertions of causality. We empirically test this assertion, employing a utility maximization choice framework and a two-stage empirical model involving modified least squares and probit maximum likelihood. We conclude that an increase in generosity and/or eligibility leniency of disability transfer programs has been a statistically significant, but quantitatively small, determinant of the decrease in labor force participation--no more than 25-30 percent. And, because the response is concentrated among older, more severely disabled men, we conclude that the impact of more generous and lenient disability transfer programs on national output is relatively small. Finally, since these findings run counter to earlier results, we attempt to identify the sources of the difference in estimated responses. Disability Transfers and Early Retirement: A Causal Relationship?