Take-Up and Labor Supply Responses to Disability Insurance Earnings Limits

In most disability insurance programs, beneficiaries lose some or all of their benefits if they earn above an earnings threshold. While intended to screen out applicants with high remaining working capacity, earnings limits can also distort the labor supply of beneficiaries. This paper develops a simple framework to evaluate this trade-off. It uses a reduction in the earnings limit in Hungary to examine screening and labor supply responses. The findings show that the policy changed selection into the program modestly, but it reduced labor supply significantly. Viewed through the lens of the model, these findings suggest that the earnings threshold should be higher