WI20-02: Firm Investment, Labor Supply, and the Design of Social Insurance: Evidence from Accommodations for Workplace Disability

This paper studies the impact of firm accommodation decisions on labor market outcomes for individuals with workplace disabilities and assesses the implications for optimal social insurance against workplace disability. We leverage detailed administrative data from a unique workers’ compensation program in Oregon that provides wage subsidies to firms for workplace accommodation. Exploiting a policy change to the wage subsidy, we find that a five-percentage point decrease in the wage subsidy rate led to a 5.5 percentage point decrease in accommodation and corresponding effects on employment and earnings through eight quarters after injury. We then develop and estimate a dynamic bargaining model between workers and firms in which labor market frictions, worker turnover, and imperfect experience rating can lead to under-accommodation and inefficient labor market outcomes after workplace disability. We use the quasi-experimental estimates to help identify key parameters of the model. Counterfactual analyses show that a wage subsidy of 40% maximizes overall worker welfare, with higher welfare gains for workers with low disutility of work during an injury in labor markets with inefficiently low accommodation rates.