Disability Retirements and Labor Force Participation

One of the data points that has been driving many people far smarter and data aware than me nuts when looking at the 2001 recession and recovery as announced by the NBER was the incredible length of time that it took for work force participation rates to move away from the anemic levels it bottomed out at. GDP and other top line measures were showing improvement but the jobs were not there for a while. From Angry Bear in December, 2005:

Despite all the happy talk from the White House about economic growth and increasing employment, the employment-to-population ratio remains at only 62.8%. While it had risen from 62.1% as of September 2003 to 62.8% as of July 2005, it has yet to reach 63%. Some of us are hoping that it will reach the 64% level, which appeared to be the natural rate of the employment-to-population ratio during the late 1990’s. On the other hand, some economists have argued that part of the reason the labor force participation rate declined from 67% to 66% was voluntary opting out of the labor force.

There are many common ways of opting out of the workforce. Going to school, or staying in graduate school to sit out a recession is a common tactic, and it is one that I took and mistimed (I graduated too early). Another common tactic is for people to start looking for early retirements and disability retirements. In tough times people who are employable but with eligible disabilities will often elect to take the disability payment and remove themselves from a tough and poorly paying labor market.

Now that there is an emerging consensus that the US economy is looking at moving sideways at best for next year, and more likely a recession of some sort appears probable in 2008, work force participation rates will probably decline. Some of the decline will be from people hiding out in school again, some will probably be an upswing for incarecaration rates, and finally people will look for other paying 'outs' including collecting disability payments that they qualify for.

Gary Farber is going through the disability qualification process right now and it is designed to discourage people from applying. The techniques including a legally mandated high standard of disability for any type of work and the ubituious waiting list and false positives of initial rejections routinely overturned on (expensive) appeals. Via the New York Times article that he linked to:

Steadily lengthening delays in the resolution of Social Security disability claims have left hundreds of thousands of people in a kind of purgatory, now waiting as long as three years for a decision.

Two-thirds of those who appeal an initial rejection eventually win their cases....

The agency’s new plan to hire at least 150 new appeals judges to whittle down the backlog...will require $100 million more than the president requested this year and still more in the future....

In a standard tougher than those of most private plans, recipients must prove that because of physical or mental disabilities they are unable to do “any kind of substantial work” for at least 12 months — if an engineer could not do his job but could work as a clerk, he would not qualify ...

If there is a recession or at least significantly increased unemployment, underemployment, and falling wages, this backlog will increase in size even if there are 150 new appeals judges as more people will make the smart decision to remove themselves from the labor market with justified claims of disability.