The Impact of the Substantial Gainful Activity Cap on Disability Insurance Recipients’ Labor Supply
Disability Insurance (DI) beneficiaries in many countries lose benefits if their earnings exceed a specified cap. An earnings cap 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 cap. However, the elasticity driving these responses is modest. Our estimates suggest that abolishing the cap would increase the labor supply of beneficiaries and reduce fiscal costs.
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