Labor Market Screening and Social Insurance Program Design for the Disabled

Naoki Aizawa, Serena Rhee and Soojin Kim
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Naoki Aizawa: University of Minnesota

No 359, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies how to optimally design subsidies for disabled workers, accounting for both the worker- and firm-side responses in the labor market. We first provide empirical evidence that firms design job characteristics, such as the flexibility of work hours, to screen out disabled workers. Then, we develop an equilibrium labor market model where firms post a screening contract which consists of wage and job characteristics; and workers with different levels of disability make labor supply decisions. We estimate the model using the Health and Retirement Study data, and identify the key model parameters by exploiting the exogenous policy variation on employment (hiring) subsidies for the disabled. Using the estimated model, we quantify the policy impacts on workers’ labor supply and firms’ employment contract design. Then, we characterize the optimal mix of the disability insurance and employment (hiring) subsidies for the disabled and study their implications on equilibrium labor market outcomes for workers of different health statuses.

Date: 2018
New Economics Papers: this item is included in nep-dge, nep-hea and nep-ias
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Working Paper: Labor Market Screening and Social Insurance Program Design for the Disabled (2019)
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