Why Are So Many Disabled Individuals Not Workingin Spain? A Job Search Approach

Unlike other disability systems in developed economies, the Spanish system allows partiallydisabled individuals to work while receiving disability benefits. The puzzle is, however, thatemployment rates in this group of individuals are very low. The aim of this paper is tounderstand the incentives and disincentives to work provided by the partial disability schemein Spain. We first present a theoretical job search model for partially disabled individuals andthen estimate a complementary log-log duration model. According to both models, theprobability of finding a job falls with the level of disability, the age at which the individualstarts receiving disability benefits, and the increase in the local unemployment rate.Moreover, as a result of an increase in the level of disability benefits we find a strongsubstitution effect that reduces the probability of disabled individuals older than 55 yearsfinding a job to almost zero, in both of the two models. We simulate that the strongsubstitution effect would be replaced by an equally large income effect even if the increase inthe benefits would not be suspended if the individual finds a job....