We use administrative records of the universe of applicants between 1991 and 2008 provided by the U.S. Social Security Administration to study how the composition of applicants for Social Security Disability Insurance (SSDI) changes with short-term fluctuations in the unemployment rate, and how such changes relate to their earnings and employment. We use fixed effect models to examine how applicants’ characteristics, earnings and employment change with the unemployment rate and decomposition methods to investigate how changes in applicants’ characteristics versus economic conditions affect their earnings and employment.
This paper found that:
- Almost all of the increase in applications and allowances for SSDI due to a higher unemployment rate is from people whose applications are either initially rejected or determined by vocational factors.
- Despite this compositional change toward applicants with a higher work capacity, we find a slightly negative relationship between post-application earnings and employment of denied applicants and the unemployment rate.
- Decomposing changes of post-applicants earnings and employment between recession and non-recession years reveals a strong negative effect of recessions that is only partly offset by the compositional shift toward applicants with higher work capacity.
The policy implications of the findings are:
- Compositional changes of applicants towards those with higher work capacity, if caused by economic conditions, may not necessarily imply that the disincentive effect of the program increases.
- Financial support and employment services could be an effective alternative to applying for DI. However, reintegrating potential SSDI applicants into the labor market may require substantial training and support, especially during recessions.