Back to work: Employment effects of tighter Disability Insurance eligibility in the Netherlands

The trends in the composition of the disability insurance (DI) program show the strong increase in the incidence of mental disorders in its rolls over the past decade. In fact, the OECD reports that the share of individuals with mental health conditions represents one third of all DI claimants, a value almost 10 percentage points larger than in 2000 (OECD, 2009). Mark Duggan (2015) claims in a Testimony before the Senate Budget Committee, that it is the liberalization of the medical eligibility criteria for DI which has led to higher application rates from individuals with ”subjective” health conditions in the US.
Such developments may be becoming the greatest challenge of the program for most industrialized countries, all the more given the low employment participation of the mentally ill, half that of individuals with other health conditions (OECD, 2009). If this is due to the strong work incapability arising from such type of conditions, DI is much needed as an earnings loss compensation for this incapability. However, if this simply points to a stronger distaste for work from the mentally ill, the distorted work incentives from DI can be easing their exit from the labor market.

Although there is substantial evidence in the literature on the work disincentives from DI, there is much less evidence on the quantification of those per disability cause. This is so because of the unavailability of such detailed data, but even more often, because of lack of power. The first objective of this paper is to evaluate the employment effects from DI, focusing in particular in its heterogeneity. We make use of administrative data for the Netherlands to evaluate the employment response from a stricter eligibility criteria for DI benefits. The extensive nature of the data allows for a segmentation of the analysis in several dimensions; we focus in particular on age and disability cause heterogeneity of the employment responses. Since the reform affected only a subset of younger beneficiaries, the impact of the reform is estimated using diverse difference-in-difference estimation strategies. A second objective will be to quantify the spillovers from DI to other income replacement social programs due to a stricter eligibility criteria. In particular, we focus on the spillovers to unemployment insurance (UI).