This paper examines the labor supply effects of
social insurance programs. We argue that this topic deserves separate
treatment from the rest of the labor supply literature because
individuals may be imperfectly informed as to the rules of the
programs and because key parameters are likely to differ for those
who are eligible for social insurance programs, such as the disabled.
Furthermore, differences in social insurance programs often provide
natural experiments with exogenous changes in wages or incomes
that can be used to estimate labor supply responses. Finally,
social insurance often affects different margins of labor supply.
For example, the labor supply literature deals mostly with adjustments
in the number of hours worked, whereas the incentives of social
insurance programs frequently affect the decision of whether to
work at all.
The empirical work on unemployment insurance (UI)
and workers' compensation (WC) insurance finds that the programs
tend to increase the length of time employees spend out of work.
Most of the estimates of the elasticities of lost work time that
incorporate both the incidence and duration of claims are close
to 1.0 for unemployment insurance and between 0.5 and 1.0 for
workers' compensation. These elasticities are substantially larger
than the labor supply elasticities typically found for men in
studies of the effects of wages or taxes on hours of work. The
evidence on disability insurance and (especially) Social Security
retirement suggests much smaller and less conclusively established
labor supply effects. Part of the explanation for this difference
probably lies in the fact that UI and WC lead to short-run variation
in wages with mostly a substitution effect. Our review suggest
that it would be misleading to apply a universal set of labor
supply elasticities to these diverse problems and populations.
Alan B. Krueger, Department
of Economics, Princeton University
Bruce D. Meyer, Department of Economics, Northwestern
University
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