Work-Limiting Disabilities and Earnings Instability

Researchers and policy makers show considerable interest in the economic well-being of disabled individuals. Earlier literature has documented the dynamic, negative, long-term impact disability has on workers, specifically focusing on earnings and income (Stephens 2001; Charles 2003; Meyer and Mok 2006; Mok et al. 2008). Research has shown that the disabled are more likely to live in poverty relative to the non-disabled (Meyer and Mok 2006) and that the onset of a disability hinders one’s ability to move up the income and earnings distributions (Nagi and Hadley 1972; Bartley and Plewis 1997). Given the negative effects disability has on earnings, income, and the movements through these distributions, it is reasonable to expect that the onset of a work-limiting disability affects earnings and income volatility.

Changes in income volatility have been well documented over the past several decades. Past research has decomposed income’s variance into its permanent and transitory components and appraised their trends. A key focus of this literature has been the transitory component of income volatility, which has steadily increased in the United States over time (Gottschalk and Moffitt 1994 and 2009; Moffitt and Zhang 2018). In this paper, we examine the contribution that disability has to earnings instability. Using the Panel Study of Income Dynamics over the 1970 to 2013 period, we follow the strategy of past literature and estimate an error components model (Berry, Gottschalk, and Wissoker 1988; Stevens 2001; Gottschalk and Zhang 2018). We separate our sample into two groups based on disability status and decompose the income volatility of each group into its permanent and transitory components.

Preliminary findings show that, prior to onset, the transitory variance of earnings for individuals who will eventually have a disability is similar to those who are never disabled. However, the variances diverge post onset, with the disabled experiencing a significant increase. We find that disability substantially contributes to income volatility with the effects persisting several years after a condition has subsided. Furthermore, disability has a larger impact on the earnings volatility of individuals under the age of 50. These results are relevant given the growth in income assistance programs for disabled persons. In future work, we will examine the differences in earnings volatility based upon the severity and chronicity of the disability.