Most disability insurance programs have earnings limits: beneficiaries lose some or all of their benefits if they earn above a threshold. These earnings limits are meant to screen out applicants with high remaining earnings capacity, but they can also inefficiently limit the labor supply of beneficiaries.
We use a policy reform in Hungary to illustrate these mechanisms. In 2008, the earnings limit accompanied to a low-value benefit of partially disabled persons, the regular social allowance was reduced from 80% of the pre-disability wage to 80% of the statutory minimum wage for new entrants, while it remained the same for beneficiaries who were already approved.
We exploit this policy change to understand how selection into the program and labor supply once in the program changed. The causal inference relies on comparing labor market outcomes of beneficiaries entering before and after the policy change. We show that individuals who enter the program before and after the reform appear similar in their employment status, earnings and other characteristics. This suggests that decreasing the earnings limit did not improve the efficiency of screening in the DI program. At the same time, applying difference in difference framework and an event study design, we find that individuals who enter the program after the earnings limit was reduced have meaningfully lower labor supply, mainly at the intensive margin. The results indicate that a low earnings limit might prevent disabled beneficiaries from fully using their remaining working capacity even if the level of the benefit is very low.