Disability policy and the labor market: Evidence from a natural experiment in Canada, 1998–2006

This paper examines the effect of changes in two key parameters in disability policy: a) the earnings that disability insurance beneficiaries are allowed to earn without losing their disability benefits; and b) automatic reinstatement where beneficiaries can have benefits reinstated without re-application, and re-testing for disability determination. We examine the effects of these policy changes on the probability of employment for disability beneficiaries as well as the flows onto and off the disability rolls. We obtain our estimates using a difference-in-difference strategy that exploits the unique structure of disability insurance arrangements in Canada, namely that there are two programs: one that covers individuals in the province of Quebec, and one in the rest of Canada. Our preferred estimates indicate that the introduction of the allowable earnings change increased the propensity of disability beneficiaries to work, but we do not find that the earnings exemption had an effect on the flows on to or off the disability rolls. In contrast, we find that the introduction of the automatic reinstatement policy did not have an effect on any of the outcomes we examine.

► An earnings exemption policy for disability beneficiaries is examined. ► The policy increased employment by 5–6 percentage points for men. ► The policy increased employment by 8–10 percentage points for women. ► We find no additional employment effect for an automatic reinstatement policy. ► The policies did not affect entering or exiting the disability rolls.