Unemployment and Disability: Evidence from the Great Recession

It is well known that disability insurance (DI) enrollment is countercyclical. But less
is known about why DI is countercyclical. Understanding this point is crucial given
the rapid rise in DI caseloads in recent decades combined with the widely publicized
forecast that the Social Security Disability Insurance Trust Fund will be exhausted
by 2016. However, no systematic evidence describes how or why caseloads have
changed during the Great Recession. In this paper, we compare DI applications and
awards during the great recession to other recent recessions. We find that changes
in the caseload from 2007 to 2010 are not unique compared with other recessions.
We then use individual data on older U.S. workers from the Health and Retirement
Study to analyze two hypotheses for why DI applications rise during recessions.
Based on research suggesting that job loss and recessions more broadly have
deleterious effects on health, we test whether the number and/or severity of health
shocks during recessions can explain elevated DI application rates. Second, we test
whether changes in the opportunity costs of applying for DI can explain higher DI
application rates during recessions. Although we find evidence that severity of
health shocks and measures of the opportunity cost of DI application predict DI
application among older workers, we find no support for either the health shocks or
opportunity cost hypothesis. Alternative explanations for the countercyclicality of
DI applications are required to describe recent recessions, including the Great
Recession.