Return-to-Work Policies for Disability Insurance Recipients: The Role of Financial Incentives

Abstract

This paper studies how financial incentives shape labor supply decisions among disability insurance (DI) recipients who already combine benefits with part-time work. We exploit a distinctive feature of the Belgian Adapted Work Program, in which DI benefits are progressively withdrawn as earnings increase and the marginal withdrawal rate rises sharply at predefined thresholds. Because participants cannot freely adjust their working hours, this setting allows us to estimate how higher implicit taxation affects transitions out of partial work. Using administrative data and a Regression Kink Design, we find that higher implicit tax rates induce exits in two opposite directions: toward full-time employment and back to full DI. A one euro increase in the implicit marginal tax per working day raises the probability of returning to full DI by 3.0 percentage points and of resuming full-time employment by 1.5 percentage points, corresponding to elasticities of 0.84 and 0.85. A simple labor supply framework rationalizes these divergent responses. Our findings show that the financial design of partial-benefit schemes can determine whether partial work serves as a bridge toward full employment or instead leads recipients back to full benefit dependency.