Would a Refundable Tax Credit Increase the Labor Supply of Impaired Adults

Matthew S. Rutledge

NBER Disability Research Center Paper No. NB 14-07
Issued in September 2014

The rise in the rolls of public disability insurance and the decline in the labor force participation rate among working-age adults has led to a renewed interest in financial incentives aimed at keeping impaired adults in the labor force. This study examines the potential labor supply response to a Disabled Worker Tax Credit (DWTC) originally proposed in 1996 by the National Academy of Social Insurance. The empirical analysis uses the Survey of Income and Program Participation to examine the change in participation, employment, and hours among impaired adults after three exogenous policy changes: the Earned Income Tax Credit (EITC) expansions of 1991 and 1994 and the creation of the 10 percent tax bracket in 2002. Preliminary estimates indicate no evidence of an increase in labor supply: parents (who are eligible for the EITC) do not increase their labor market activity by more than non-parents, and the correlation between the value of tax incentives and labor supply is weak. These results suggest that impaired adults would not substantially respond to a DWTC, and that keeping workers with

work-limiting health conditions in the labor force – and drawing disability beneficiaries and others out of the labor force back in – would take more than just financial incentives.

PDF (198 K)Executive Summary (60 K)