Where does the withdrawal of disability benefits lead?


Empirical research shows that the more generous the disability benefit system, the more likely it is that beneficiaries will increase the take-up of benefits and to exit the labor market. But what are the effects of an abrupt reduction in benefit or their being completely phased out upon the reemployment of those affected?

Judit Krekó, senior researcher at BI reported about these impacts at the ESPAnet’s 18th Annual Online Conference, based on the paper she co-authored with Anikó Bíró (CERS - Institute of Economics), Cecilia Hornok (Kiel Institute for the World Economy), Dániel Prinz (Institute for Fiscal Studies) and Scharle Ágota (BI).

The analysis focuses on the impacts of a major disability reform in 2012 in Hungary, whose goal was not only to tighten the conditions of accessing disability benefits, but also prescribed a health review for a large group of Disability Insurance (DI) recipients. As a consequence, many of them faced a partial or full loss of their benefit. The objective of the radical measure, in addition to curbing inflow into DI, was to reactivate the recipients.

In the quantitative analysis, the researchers used a large and high-quality linked administrative dataset (ADMIN3), with the help of which they estimated the effect of the benefit loss/reduction on different labour market outcomes (employment probability, job duration, wages). They assumed that these effects depended on baseline health and on earlier employment history.

The hypothesis was that, while financial incentives (e.g. various employer tax benefits, rehabilitation contribution) may improve DI beneficiaries’ labor market outcomes, an abrupt withdrawal of the benefit or a drastic decrease in the amount is not sufficient to reactivate those affected. Indeed, long periods of inactivity can lead to a devaluation of human capital and a disengagement from the labour market, making it more difficult for people excluded from benefits to successfully re-enter the labour market. Rather, the authors expected that such harsh financial incentives lead to lower quality employment and might also have negative health implications.

The Hungarian reform provided a number of lessons on the employment and health consequences of drastic activation policies.

Read on for more details:

Impact of drastic cuts in accessing insured benefits on health and labour market outcomes

You can find the full programme of ESPAnet’s Annual Conference here.