The added worker effect: Evidence from a disability insurance reform

The Netherlands reformed its disability insurance (DI) scheme in 2006. The reform increased the period on sickness benefits from 12 to 24 months. Access to disability benefits after this period became more difficult and the benefits became less generous. Using administrative data on all individuals who reported sick shortly before and after the reform, we study the impact of the reform on labor participation of individuals who fell sick and their spouses during the next ten years. Difference-in-differences estimates imply that the reform increased
the labor participation of sick individuals and their spouses by 1.1 and 0.9 percentage points, respectively. Both effects are persistent in the years following the reform. We interpret the effect on the spouse as an “added worker effect” where additional earnings of the spouse compensate the sick individual’s income loss so that both partners share the burden of a more stringent disability scheme. This interpretation is confirmed by estimations that distinguish between individuals who had a permanent work contract, a temporary contract,
or were unemployed when falling sick. It is also in line with differences between reform effects on sick individuals with and without a spouse.