The Effect of Cutting Disability Insurance Benefits on Labor Supply in Households

Previous empirical literature has shown a substantial extent of work disincentives in the Disability Insurance (DI). While its focus has been on the inflow into DI and on increases in benefits, this study focuses on a partial benefit cut and on existing beneficiaries. The partial benefit reduction affected married DI beneficiaries only and was also dependent on their entry into DI. The richness of the dataset allows me to look at the behavioral response on labor market participation from the spouse and not only from the beneficiary. Using a difference-in-differences methodology, I find no effect on labor supply or earnings for both members of the couple. If anything, there might be spillover effects into means-tested social insurance. These results indicate partially cutting benefits is not an effective policy to increase labor supply of existing DI beneficiaries.