The Impact of Disability Benefits on Labor Supply: Evidence from the Va's Disability Compensation Program

62 Pages Posted: 11 May 2015 Last revised: 10 Apr 2023

See all articles by David H. Autor

David H. Autor

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Mark Duggan

Stanford University - Department of Economics

Kyle Greenberg

U.S. Military Academy; Massachusetts Institute of Technology (MIT) - Department of Economics

David S. Lyle

Massachusetts Institute of Technology (MIT) - Department of Economics; United States Military Academy, West Point

Date Written: May 2015

Abstract

Combining administrative data from the U.S. Army, Department of Veterans Affairs (VA) and the U.S. Social Security Administration, we analyze the effect of the VA’s Disability Compensation (DC) program on veterans’ labor force participation and earnings. The largely unstudied Disability Compensation program currently provides income and health insurance to almost four million veterans of military service who suffer service-connected disabilities. We study a unique policy change, the 2001 Agent Orange decision, which expanded DC eligibility for Vietnam veterans who had served in-theatre to a broader set of conditions such as type 2 diabetes. Exploiting the fact that the Agent Orange policy excluded Vietnam era veterans who did not serve in-theatre, we assess the causal effects of DC eligibility by contrasting the outcomes of these two Vietnam-era veteran groups. The Agent Orange policy catalyzed a sharp increase in DC enrollment among veterans who served in-theatre, raising the share receiving benefits by five percentage points over five years. Disability ratings and payments rose rapidly among those newly enrolled, with average annual non-taxed federal transfer payments increasing to $17K within five years. We estimate that benefits receipt reduced labor force participation by 18 percentage points among veterans enrolled due to the policy, though measured income net of transfer benefits rose on average. Consistent with the relatively advanced age and diminished health of Vietnam era veterans in this period, we estimate labor force participation elasticities that are somewhat higher than among the general population.

Suggested Citation

Autor, David H. and Duggan, Mark and Greenberg, Kyle and Lyle, David S., The Impact of Disability Benefits on Labor Supply: Evidence from the Va's Disability Compensation Program (May 2015). NBER Working Paper No. w21144, Available at SSRN: https://ssrn.com/abstract=2604825

David H. Autor (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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Mark Duggan

Stanford University - Department of Economics ( email )

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Kyle Greenberg

U.S. Military Academy ( email )

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Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

David S. Lyle

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

United States Military Academy, West Point ( email )

600 Thayer Rd
West Point, NY 10996
United States

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