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

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.

What is the effect of changing eligibility criteria for disability benefits on employment? A systematic review and meta-analysis of evidence from OECD countries

“…Two of these studies found that the expansion of the US Veterans’ Affairs Disability Compensation program (VDC) to include people with diabetes was associated with a decline in employment amongst male veterans. Autor et al (2015) found that 18 percent of all newly eligible veterans left the labour force, while Autor and Duggan (2007) concluded that the policy change was associated with a significant, and substantial, reduction in employment among veterans [ 19 , 20 ]. Autor and Duggan (2003) also found that the use of a broader definition of disability in the US Disability benefit programme from 1984 was associated with reduced employment of low educated older men and women, but did not have the same effect on higher educated groups [ 9 ].…”

“…Relative risks of the policy effects were calculated for 39 of the 40 results. The relative risk could not be calculated for one study as the results were presented per 1 percentage point increase benefit enrolment, rather than as the overall policy effect [ 20 ]. Only two studies investigated effects by socioeconomic group and therefore we could not analyse differences in the meta-analysis.…”