Working Paper: CEPR ID: DP12979
Authors: Philippe Ruh; Stefan Staubli
Abstract: Most countries reduce Disability Insurance (DI) benefits for beneficiaries earning above a specified threshold. Such an earnings threshold generates a discontinuous increase in tax liability—a notch— and creates an incentive to keep earnings below the threshold. Exploiting such a notch in Austria, we provide transparent and credible identification of the effect of financial incentives on DI beneficiaries’ earnings. Using rich administrative data, we document large and sharp bunching at the earnings threshold. However, the elasticity driving these responses is small. Our estimate suggests that relaxing the earnings threshold reduces fiscal cost only if program entry is very inelastic.
Keywords: disability insurance; labor supply; benefit notch; bunching
JEL Codes: H53; H55; J14; J21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| earnings elasticity with respect to net-of-tax rate (H32) | responsiveness of beneficiaries (F35) |
| SGA threshold (C24) | average earnings if threshold did not exist (J31) |
| relaxed earnings restrictions (H31) | labor force participation of DI beneficiaries (J21) |
| SGA threshold (C24) | earnings of DI beneficiaries (H55) |
| SGA threshold (C24) | bunching of earnings below threshold (H31) |