PhD Seminar: Disability Benefit Reform, Employment and Welfare: Evidence from Australia’s Welfare-to-Work Reforms

Disability Benefit Reform, Employment and Welfare: Evidence from Australia’s Welfare-to-Work Reforms

Abstract: We study the labour market effects of tightening eligibility criteria in disability and income support programs for individuals with partial work capacity. Such reforms typically lower the threshold for qualifying for long-term benefits or introduce stricter reassessment rules, generating differential exposure across cohorts. We use the Australian Welfare-to-Work reforms as a case study, which tightened eligibility for the Disability Support Pension (DSP) by reducing the work-capacity threshold from 30 to 15 hours per week. The reform created quasi-experimental variation through grandfathering provisions and staggered implementation, as pre-reform recipients were exempt while new claimants were gradually exposed to stricter rules. Leveraging linked administrative data from the Person-Level Integrated Data Asset (PLIDA) and a staggered difference-in-differences design, we estimate the causal effects of stricter eligibility on labour market outcomes. We find that exposure to tighter eligibility reduces employment and labour earnings in the short run. Contrary to the policy objective of increasing workforce participation, affected individuals experience persistent declines in employment and earnings, with little evidence of sustained labour market attachment. To assess broader implications, we develop a structural overlapping generations model with heterogeneous agents, health risk, and endogenous labour supply. The model quantifies the macroeconomic and welfare consequences of eligibility tightening across cohorts differentiated by disability severity and skill. It highlights a central trade–off between insurance provision and work incentives.