Working Paper: NBER ID: w27478
Authors: Naoki Aizawa; Soojin Kim; Serena Rhee
Abstract: This paper studies how firms’ screening incentives in the labor market affect the optimal design of social insurance programs and quantitatively assesses the U.S. disability policies accounting for firms’ screening of the disabled. We develop an equilibrium search model where workers with different productivities have heterogeneous preferences over non-wage benefits and firms cannot offer an employment contract that explicitly depends on worker types. In this environment, firms may use contracts to screen out a certain type of workers, distorting employment rates and contracts in equilibrium. Therefore, the optimal structure of social insurance policies depends on firms’ screening incentives. We extend and structurally estimate this framework to quantitatively understand the inefficiencies arising from firms’ incentives to screen out disabled workers and examine the optimal joint design of disability insurance (DI) and various forms of firm subsidies. We find that hiring subsidies mitigate screening distortions; at the same time, they interact with DI by reducing the labor supply disincentives it generates. The optimal policy structure leads to a considerable welfare gain by simultaneously making firm subsidies and DI benefits more generous.
Keywords: disability insurance; labor market policies; screening; social insurance
JEL Codes: E61; H21; H51; I18; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm subsidies (G32) | screening distortions (C21) |
| firm subsidies + DI (G32) | labor supply disincentives (J22) |
| optimal policy structure (L21) | social welfare (I38) |