In the United States right now, the Disability Insurance program has come to serve as a kind of ersatz welfare. Not only do severely disabled people get DI benefits, but oftentimes maladies that seem more socioeconomic in origin than medical—chronic back pain plus a low level of education—get treated. The program is structured to create substantial work disincentives. Tellingly, factory closures are associated with localized increases in Disability Insurance enrollment. It's not that people's medical condition worsens forcing them onto disability, instead their economic prospects worsen which forces them onto disability. I know some folks didn't like Chana Joffe-Walt's recent This American Life story on the subject, but I thought it told the story quite well.
Unfortunately, it has sparked an upsurge of interest in reforming Disability Insurance.
My suggestion—lets not worry about this for a bit. Draw up reform schemes if you like and leave them in a filing cabinet somewhere. We may have to cross this bridge one of these days, and since I believe the Dutch dealt with a similar issue relatively recently we should probably try to learn from them.
But at the moment, nobody thinks that lack of labor force participation among low-skilled workers is a binding constraint on growth. That's certainly a situation that can arise and might arise at some point. But today? No way. Weak growth is causing low labor force participation, not the other way around. The work disincentive in the program structure is real enough, but the benefits are so stingy that only somebody with genuinely bad earnings potential would be trapped by them. Making the program stingier would be inhumane, and eliminating the disincentives by making it more generous would be more costly than congress wants to contemplate. So let's let it go for a bit. Address the labor market with monetary policy. Stop holding back investments in mult-family housing and mobile homes (and food trucks) for that matter.
The unemployment rate—which, recall, only measures the people who are in the workforce—is still really high, especially for the less-educated people who are the objects of this concern. If it falls another percentage point or two and the participation rate doesn't rise on its own, then I'll start worrying about structural barriers to participation.
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