Local Labor Market Conditions and the Federal Disability Insurance Program: New Evidence from the Bakken Oil Boom

Abstract

The Social Security Disability Insurance (DI) program is the largest income replacement program in the United States for non-elderly adults. Growth in the DI program since the 1970s coincided with a well-documented decline in wages and labor force participation of low-skilled workers. Since DI is more attractive as outside options decline, a key question in labor and public economics is the extent to which secular changes in the labor market have led to increases in DI program participation. In this paper, I exploit an exogenous positive labor demand shock caused by a boom in oil production in the Bakken formation covering parts of Montana, North Dakota, and South Dakota to estimate the impact of earnings growth on DI payments and participation. Using the value of county oil reserves as an instrument for earnings, my estimates suggest a strong negative relationship between local economic conditions and DI payments and participation. I find an elasticity of DI payments with respect to local earnings of -1 and an elasticity of DI participation with respect to earnings of -0.7.