The Disability Option: Labor Market Dynamics with Macroeconomic and Health Risks

January 31, 2019

By Amanda Michaud and David Wiczer

We evaluate the contribution of changing macroeconomic conditions and demographics to the increase in Social Security Disability Insurance (SSDI) over recent decades. Within our quantitative framework, multiple sectors differentially expose workers to health and economic risks, both of which affect individuals’ decisions to apply for SSDI. Over the transition, falling wages at the bottom of the distribution increased awards by 27% in the 1980s and 90s and aging demographics rose in importance thereafter. The model also implies two-thirds of the decline in working-age male employment from 1985 to 2013, three-fourths of which eventually goes on SSDI.

This is important news in understanding the decline in the labor force participation. I would be very curious to see this studied in other countries, especially in those where the labor force participation did not decline.


Innovation and Trade Policy in a Globalized World

January 11, 2019

Ufuk Akcigit, Sina T. Ates and Giammario Impullitti

How do import tariffs and R&D subsidies help domestic firms compete globally? How do these policies affect aggregate growth and economic welfare? To answer these questions we build a dynamic general equilibrium growth model where firm innovation endogenously determines the dynamics of technology, market leadership and trade flows, in a world with two large open economies at different stages of development. Firms R&D decisions are driven by (i) the defensive innovation motive, (ii) the expansionary innovation motive, and (iii) technology spillovers. The theoretical investigation illustrates that, statistically, globalization boosts domestic innovation through induced international competition. Accounting for transitional dynamics, we use our model for policy evaluation and compute optimal policies over different time horizons. The model suggests that the introduction of the Research and Experimentation Tax Credit in 1981 proves to be an effective policy response to foreign competition, generating substantial welfare gains in the long run. A counterfactual exercise shows that increasing tariffs as an alternative policy response improves domestic welfare only when the policymaker cares about the very short run, or when there is retaliation by the foreign economy. Protectionist measures generate large dynamic losses by distorting the impact of openness on innovation incentives and productivity growth. Finally our model predicts that a more globalized world entails less government intervention, thanks to innovation-stimulating effects of intensified international competition.