The Reservation Wages of Social Security Disability Insurance Beneficiaries

By Mitra, Sophie | Social Security Bulletin, October 1, 2007 | Go to article overview
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The Reservation Wages of Social Security Disability Insurance Beneficiaries


Mitra, Sophie, Social Security Bulletin


Summary

There exists a lot of research on the reservation wages of the unemployed as a determinant of unemployment duration. Little is known about the reservation wages of those who are not in the labor force but might be potential labor force returnees, such as Social Security Disability Insurance (DI) beneficiaries. The main objective of this article is to assess what can be learned from the subjective reservation wages of DI beneficiaries. Using the New Beneficiary Data System (NBDS), the article assesses the magnitudes of reservation wages compared to the last wage earned and the benefit amount, as well as the determinants of reservation wages in a regression framework. The NBDS is unique in that it provides the reservation wages and the work history of DI beneficiaries before and after joining the DI rolls.

The article has several noteworthy results and policy implications:

* Data show that a significant portion of beneficiaries report being likely to accept a job if offered one. Based on the NBDS, 13?percent of DI beneficiaries who did not work since joining the rolls in 1981-1982 reported in 1991 that they would be willing to work if offered a job and provided their reservation wages.

* DI beneficiaries do not appear to price themselves out of the labor market. Half of them would want a wage that is 80? percent or less of the last wage earned before receiving DI. It is estimated that approximately 7?percent of long-term DI beneficiaries may potentially return-to-work if they search for jobs and have a wage offer distribution with a mean at 80? percent of their last wage.

* The nonlabor income in addition to the benefit is positively and significantly associated with the reservation wage, while the benefit amount per se is not. However, this result needs to be treated with caution given that nonlabor income is endogenous to the model.

* Heterogeneity exists between persons still under the DI program and those that have moved to the Old-Age program. The subsamples of persons who have shifted to the Old-Age program and those who are still under the DI program have median reservation wage to the last wage ratios of 0.69 and 0.93, respectively. A significantly lower reservation wage for persons who have moved to the Old-Age program was also found in a regression framework. This heterogeneity between the two groups may result in part from the different program characteristics both groups face, for instance, in terms of benefit termination and Medicare eligibility rules.

* Subjective reservation wage data can be useful to study populations that are out of the labor force. This article is innovative in that it focuses on a group of persons who are typically considered as being out of the labor force, and therefore are not asked reservation wages in general household surveys such as the Current Population Survey. It would be of great interest to collect more reservation wage data for DI beneficiaries in a longitudinal data set to expand this analysis, for instance, to assess conclusively the effects of changing program characteristics on reservation wages and return-to-work outcomes as beneficiaries transition to the Old-Age program or as new return-to-work programs are put in place.

(ProQuest: ... denotes formulae omitted.)

Introduction

The objective of this article is to examine the reservation wages of Social Security Disability Insurance (DI) beneficiaries, and derive implications for return-to-work policy. In labor economics, in the labor leisure choice model, the reservation wage is a fundamental aspect of the decision to work or not to work. The reservation wage is the amount an individual would need to earn at work in order to accept a job. For a beneficiary to return to work, the market wage would need to exceed the reservation wage. Reservation wages of DI beneficiaries are important in the context of return-to-work policies for the DI program.

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