Abstract

Over the last three decades, the U.S. labor force has increased by less than thirty percent, while the number of Social Security Disability Insurance (DI) beneficiaries has almost tripled, despite improvements in overall labor force health. This thesis examines individual-level DI participation using micro-public surveys and a blend of empirical and theoretical dynamic models, presented in three chapters.

The first chapter explores the relationship between DI participation, skill level, and labor market outcomes. By extending the Diamond-Mortensen-Pissarides framework to include heterogeneous skills and endogenous DI participation, the model examines the effects of aggregate productivity, health-related eligibility criteria, and DI application success rates. Key findings include: (1) economic downturns prompt higher-skilled individuals to seek disability benefits, narrowing the wage gap; (2) relaxed health-related eligibility criteria increase DI participation among less skilled workers, widening the wage gap; and (3) higher DI application success rates boost participation with minor effects on skill composition.

The second chapter investigates how health, productivity, and labor market outcomes influence DI participation. Using the Panel Study of Income Dynamics (PSID), the study finds that better health conditions are associated with higher wage growth and lower DI participation probability. An equilibrium search model incorporating health-driven productivity, endogenous DI participation, and job separation reveals that health shocks significantly impact DI participation and labor market outcomes. Policy evaluations show that shorter initial determination periods raise unemployment, while shorter appeal processes reduce it. The persistence and volatility of individual health conditions are critical for understanding DI participation levels.

The third chapter analyzes the impact of non-health factors, such as DI and Unemployment Insurance (UI) benefit replacement rates and unemployment duration, on DI participation using an empirical logistic model. This chapter provides the first microdata-based evidence on these factors. Results indicate that higher DI benefit replacement rates and longer unemployment duration strongly increase DI participation, especially among less educated and older workers.

In summary, this thesis offers a comprehensive analysis of DI participation, highlighting the roles of economic conditions, health dynamics, and policy factors in shaping labor market and DI outcomes.