How Does Unemployment Insurance Affect the Decision to Apply for Social Security Disability Insurance

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by Stephan Linder, University of Michigan

The purpose of Social Security Disability Insurance (DI) is to insure against long-term income loss due a disability. However, recent work has emphasized that for workers with prior health impairments, the event of a job loss often leads to application for DI. This paper addresses how one major short-term determinant of income for jobless workers, unemployment insurance (UI), affects the decision to apply for DI. First, UI take-up may deter workers from applying for DI if they believe that use of UI reduces their chances to receive DI. Second, UI benefits can influence the DI application decision in two opposing ways: on the one hand, higher UI benefits may reduce the need for DI benefits, but on the other hand, higher benefits also provide income support while applying, which facilitates application for DI.

To tests the theoretical predictions, SIPP surveys are matched to administrative records on DI applications in order to create spells of non-employment that can end with an application for DI. Estimating a hazard model of DI application with endogenous UI take-up and correlated random effects shows that UI take-up, higher UI benefits and longer UI maximum benefit duration reduce the hazard to DI application. The results suggest that providing more or longer short-term cash benefits for unemployed workers might be an effective policy to reduce the number of DI beneficiaries.

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