All welfare states – generous and restrictive –grapple with the question of how to design disability benefits. When benefits are large relative to market wages, and the criteria for disability are fairly loose, individuals with moderate health impairments that could work productively in the labor market have a much greater incentive to go on to disability benefits and a much weaker incentive to get off disability when their health status improves.
The size of these effects, and the types of policies that are likely to trigger them is a largely unsettled question. To examine these questions, a team of researchers from 12 countries has undertaken a massive comparative analysis through the “Social Security Programs and Retirement Around the World” project. (A short version of their report, available to scholars through NBER, can be found here.)
Back in My Day We Used to Work Harder (err Sicker…)
One challenge in comparing countries and time periods is the variation in health status: the average 60 year old in all countries today is on average a lot healthier than his grandfather was and probably has one decade longer of physically productive years than his grandfather did. Mortality data (a well-measured and well-collected outcome) bears this outcome out: age-specific mortality rates have plummeted since the 1970s in all countries.
If mortality is a proxy for health status, we might expect that it would help to predict labor force participation rates since, in general, healthier people stay more productive and working for longer. The figure below takes a bit of interpretation, but helps to provide a comparable way of viewing the workforce participation rates of age groups with equivalent mortality rates across countries (allowing that in some countries people are healthier for longer). As the figure shows, for those age bands with lower mortality probabilities (all younger workers) the employment rate is quite similar, but as mortality risk grows, there is a large divergence in employment rates. The simple point is that health status is not the only, or even the most important driver of workforce participation.
To further emphasize this point, the authors also undertake some within-country analyses of employment rates by age groups over time, and find that there is no consistent increase in workforce participation despite across the board declines in mortality rates at older age brackets. For their health status, men are working a lot less than they used to. For example, 90% of men in the UK with a 1.5% probability of mortality in 1977 were workers, compared to only 30% of men in 2007. The figure below provides an illustration.
Do Societies Claim Less Disability as They Get Healthier?
Turning to disability insurance participation rates, the authors find little association between DI participation rates and declines in mortality. In Britain and Canada, for example, mortality for men ages 60 to 64 declined monotonically between 1971 and 2007, but disability insurance participation rates spiked in the 1990s and declined in the last decade. One possibility is that DI participation is a lagging indicator: countries might adopt DI policies in response to low labor force participation rates, rather than vice versa. This makes estimating the causal effect of DI on labor force participation tricky.
The authors suggest that they can exploit some natural experiments, and they describe several countries including France, Denmark, Germany, Sweden, and others. In all cases, they find that exogenous reforms have a large effect on workforce participation rates. A good example is Belgium, which was forced in 1997 to harmonize its retirement policies for men and women by the European Court of Justice. This ruling raised the retirement age for women, leading to a much greater takeup of both DI and a greater labor force participation rate (and suggesting that DI and retirement are likely to be substitutes for one another). See figure below.
Research of this kind will inevitably work its way into the roiling policy debate about retirement age and disability policy (our dear colleague Ben spends many of his waking hours on this topic). A provocative way of putting the point is this: does some notion of inter-generational fairness require that we make workers in each generation work the same number of healthy years? If so, does that mean that as time goes on we will (on average) ask more workers to work longer amounts of time? Finally, can we get a handle on these questions without first solving the problem of intra-generational inequality (the fact that the poor die younger and work harder jobs)?
I don’t have to answer all the questions I pose…