Gustavo de Souza, Chicago FED

"The Fiscal Consequences of Active Labour Market Policies: The Case of Quota for Disabled Workers"

Abstract

Expenditure with disability insurance has been on the rise in all developed countries. To reduce disability insurance expenditure, the Brazilian government mandated firms with more than 100 workers to have from 2% to 5% of their labor force filled by disabled workers. In this paper I ask: What is the effect of disabled workers' quota on the government's revenue and disabled insurance expenditure? I start with a model of labor force participation with disabled workers. Disabled workers have higher labor supply disutility, lower productivity, and receive disability insurance if not working. I show on the model that the relative productivity of disabled workers can be identified by the effect of the quota on firms while the disutility of disabled workers can be identified by the aggregate effect of the quota on wages. I use administrative data on inspections of the disabled quota to identify how hiring disabled workers affected firms and estimate the productivity of disabled workers. As a response to the inspection, firms reduce their growth rate and wages, even of non-disabled employees. Using regional variation to the disability quota, I also find that the quota increased the wage of disabled workers by 4.1% and labor force participation by 16.5%. From these results, the fiscal efficiency of this policy is cast in doubt. It reduced costs with disability insurance but also reduced revenue from payroll taxes.

Contact person: John Vincent Kramer