by Stephan Lindner, The Urban Institute
Applications for Social Security Disability Insurance (DI) are strongly counter-cyclical, yet very little is known regarding how characteristics of applicants change over the business cycle. This study addresses the question whether applicants who apply during a recession have on average less severe health impairments and a higher work capacity than applicants who apply when there is no recession. The first part documents characteristics of applicants linked to work capacity (such as age, health impairment, and past and future earnings and employment) before, during, and after two recessions, the one in the early 1990s and the one in the early 2000s. Using administrative records on applications and awards, changes over the course of these business cycles are examined by calculating means of applicants’ characteristics by month or quarter of application.
The study then estimates how changes in such characteristics translate into changes in work capacity. For that, employment and earnings of denied applicants as an observable proxy of work capacity of all applicants are analyzed. Two opposing effects of the recession on employment and earnings are plausible. If more marginal applicants with a higher work capacity apply during a recession, then post-application earnings and employment of denied applicants who apply during a recession are on average higher. However, being out of work during an economic downturn can also stifle employment prospects and therefore lead to lower post-applications earnings and employment.
In order to examine the relative importance of these effects, earnings and employment of two groups of denied applicants, those who apply during a recession and those who apply when there is no recession, are compared. Using decomposition methods such as the Oaxaca-Blinder decomposition, differences in earnings and employment between these groups two to four years after application are decomposed into changes due to individual characteristics and changes due to economic conditions.