Unemployment insurance expansions could reduce disability benefit utilization

When policymakers debate unemployment insurance (UI) reforms, the focus often centers on the balance between benefit generosity and the time recipients take to secure new employment. Meager benefits may not afford unemployed workers enough time to find a good job match, but research studies vary on what the optimal wage replacement rate should be. Overly generous benefits could unnecessarily delay a return to work.

Emerging evidence suggests this tradeoff is more complex than typically portrayed. Policymakers should also consider a related but less discussed factor: more generous unemployment benefits may reduce participation in other public assistance programs, such as disability benefits. For many unemployed Americans, their weekly UI check is the primary motivation to continue their job search. If benefits are too low, workers may leave the labor force entirely or turn to alternative forms of assistance. In such cases, more generous UI benefits might prove less costly overall when factoring in these potential substitutes.

In a new working paper, Zach Parolin (Bocconi University) and Clemente Pignatti (International Labour Organization) provide evidence for this dynamic. When analyzing the impact of reforms increasing unemployment benefit generosity in states from 1990 to 2013, Parolin and Pignatti found that more generous benefits correlated with longer unemployment spells and resulted in reduced take-up of SNAP in the short-run and Social Security retirement (OAI) and disability benefits (SSDI) in the long-run. Many workers experienced longer unemployment spells because they chose to continue searching for jobs, with their UI claims crowding out use of other programs. Overall, a $1,000/month increase in maximum possible benefits led to a 16% lower probability of claiming other benefits.

These substitution effects–that is, the extent to which individuals opting for UI led to lower take up of alternatives–varied according to the program. UI recipients in states that recently increased benefit generosity had reduced SNAP participation up to a year after their unemployment spell began. The lower SNAP take-up came from UI beneficiaries who were simultaneously eligible but did not apply. Meanwhile, there was a longer-term reduction in Social Security retirement and disability insurance participation due to prolonged labor market participation. The greater generosity incentivized older and disabled workers to continue actively looking for jobs rather than exiting the workforce altogether, contributing to greater employment over time. About 20% of the cost of the increased UI benefits was offset by reduced participation in these other programs.

Parolin and Pignatti are not alone in finding that American workers will substitute UI in for other types of social assistance. A Michigan-based analysis of means-tested programs between 2005 and 2010 showed that UI benefit receipt resulted in lower TANF usage among low-earning individuals (but no impact on Medicaid and SNAP receipt). Another study, using Survey of Income and Program Participation (SIPP) data from 1990 to 2006, found that unemployed individuals were less likely to apply for SSDI during UI extensions, and had a higher probability of applying for disability once exhausting their UI benefits. That study determined that half the cost of a 13-week UI extension was offset by lower SSDI and Medicare costs. Similarly, a third paper concluded that a $1 increase in UI benefits reduced DI payments by 15 cents. 

Interestingly, the substitution effect appears to be more pronounced for SSDI than for traditional welfare programs. Potential SSDI recipients were less likely to turn to disability benefits when securing jobs (doing so would likely require giving up that new role). In contrast, individuals forgoing SNAP, or TANF as seen in the Michigan study, may still be eligible and claim those benefits even after securing new employment.

Policy implications

This dynamic could be of particular interest to policymakers looking to promote work and independence among working-age individuals with serious health limitations. Previous efforts to increase labor force participation among disabled Americans receiving SSDI have focused on employment programs and trial work periods, which are designed to support transitions back to jobs after they have left the labor market and begun receiving SSDI benefits.

This type of re-employment approach faces a number of challenges. Recipients are likely to have employment gaps extending at least several years, making it difficult to be considered for quality jobs. Tentative employment is also not worth risking total benefit loss given the arduous, often multi-year effort(s) required to qualify for benefits. Furthermore, many individuals who attempt to return to work encounter overpayment issues, and often must pay back thousands of dollars as a consequence of administrative complexities. It should come as no surprise that a very small percentage of recipients eligible for reemployment assistance, such as Ticket to Work, actually take advantage of the program. 

Addressing these issues by tightening SSDI eligibility would likely force many recipients into worse financial positions given their real health limitations (as has been the case with other U.S. disability benefits). A more effective pathway to higher employment could instead be to incentivize disabled, jobless workers to continue as labor force participants via generous UI benefits. As Parolin and Pignatti’s research suggests, some workers who might otherwise apply for SSDI out of necessity will choose to remain in the labor force and secure employment when provided financial stability during work search periods.

The key is replacing a sufficient portion of workers’ income. Whether UI serves as a strong incentive to remain in the labor force depends on policymakers’ willingness to finance those bigger benefits. Opposition often arises from concerns that generous assistance unnecessarily delays a return to work. However, more attention should be given to the pro-employment incentives that UI expansions create. When considering the benefit substitution effects, the overall cost of expanding UI becomes less burdensome.