How Does the Income Effect Vary with Skill Level for Workers with Disabilities? Evidence from Workers’ Compensation

Understanding how skilled vs. unskilled workers respond to disability benefits could help SSA determine how skill level should factor into disability determinations. Individuals with transferable skills could be better able to adapt to new occupations after the onset of a health condition that prevents them from returning to their previous occupations, which could make them more or less responsive to the amount of disability benefits. However, given that that benefits are determined by one's prior earnings using the same formula for all disabled workers, it is impossible to test whether return-to-work outcomes for workers with and without transferable skills differ in their sensitivity to the amount of disability benefits. This paper takes advantage of a policy change to permanent partial disability (PPD) benefits in Oregon workers’ compensation to identify an income effect in response to disability benefits, and to examine how this income effect varies with a worker’s skill level. In practice, the policy change resulted in nearly every individual receiving a different PPD benefit after 2005 compared to what she would have gotten prior to 2005. We find that unskilled workers are more responsive to benefit levels than skilled workers for a range of return-to-work outcomes including employment, earnings and weekly hours. For example, a $1,000 increase in PPD benefits results in a 0.35% decline in the probability of return-to-work for unskilled workers, compared to a 0.15% decline in the probability of return-to-work for skilled workers. While these estimates seem small it is important to keep in mind that a change in PPD benefits represents a one-time change in nonlabor income. Indeed, if we rescale estimates from the prior literature to represent a one-time change in benefit levels then our estimates are in line with, if not larger than, other recent estimates of income effects for this population.