The employment effects of disability benefit reassessment
Highlights
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We study a disability insurance reassessment reform in Hungary using variation generated by a birthday cutoff.
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In line with a perceived threat of benefit loss, recipients reduced work even before cuts, despite no binding earnings limit.
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Benefit removal increased employment gradually, but many experienced periods without work or benefits.
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Overall employment and earnings impacts were negative in the short term and near zero in the medium term.
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Reassessments affect work not only through realized benefit loss but also through responses to perceived eligibility risk.
Abstract
We study the consequences of a large-scale reassessment of the health and working capacity of disability insurance beneficiaries in Hungary. Leveraging birthday and health cutoffs in the reassessment, we estimate employment responses to the threat of disability benefit loss and the actual termination or reduction of benefits. We show that due to the threat of benefit removal, many beneficiaries stopped working after the reassessment was announced but before it took place. Another group of beneficiaries lost their benefits and increased their labor supply significantly. Overall, the reassessment had a negative short-term and neutral medium-term impact on employment and earnings. Our results suggest that unintended responses to the threat of benefit loss operate as a substitution effect that can reduce labor supply even without binding formal earnings limits, and thus should be considered in the design of reassessments.
