Research Paper Fundación de Estudios de Economía Aplicada Working Papers 2009-28
Disability, capacity for work and the business cycle: an international perspective
An important policy issue in recent years concerns the number of people claiming disability benefits for reasons of incapacity for work. We distinguish between ‘work disability’, which may have its roots in economic and social circumstances, and ‘health disability’ which arises from clear diagnosed medical conditions. Although there is a link between work and health disability, economic conditions, and in particular the ‘business cycle’ and variations in the risk of unemployment over time and across localities, may play an important part in explaining both the stock of disability benefit claimants and inflows to and outflow from that stock. We employ a variety of cross-country and country-specific household panel data sets, as well as administrative data, to test whether disability benefit claims rise when unemployment is higher, and also to investigate the impact of unemployment rates on flows on and off the benefit rolls. We find strong evidence that local variations in unemployment have an important explanatory role for disability benefit receipt, with higher total enrolments, lower outflows from rolls and, often, higher inflows into disability rolls in regions and periods of above-average unemployment. Although general subjective measures of selfreported disability and longstanding illness are also positively associated with unemployment rates, inclusion of self-reported health measures does not eliminate the statistical relationship between unemployment rates and disability benefit receipt; indeed including general measures of health often strengthens that underlying relationship. Intriguingly, we also find some evidence from the United Kingdom and the United States that the prevalence of self-reported ‘objective’ specific indicators of disability are often pro-cyclical - that is, the incidence of specific forms of disability are pro-cyclical whereas claims for disability benefits given specific health conditions are counter-cyclical. Overall, the analysis suggests that, for a range of countries and data sets, levels of claims for disability benefits are not simply related to changes in the incidence of health disability in the population and are strongly influenced by prevailing economic conditions. We discuss the policy implications of these various findings.