The Efficiency of Government Disability Programs: An International Comparison

Enrica Croda, Università Ca' Foscari Venezia

There are large variations across countries in the percentage of GDP devoted to disability payments, ranging in western countries from 0.4 percent in Canada to 2.5 percent in Sweden. Previous research has stressed the importance of institutional features of DI programs in explaining overall costs, but much less is known about the efficiency of such programs in their ability to screen applicants and thereby avoid Type 1 error (providing benefits to healthy recipients) or Type 2 error (denying benefits to unhealthy applicants). In this paper, we use SHARE and HRS data to infer attributes of country-level DI programs across Europe and the US. We first develop a model that decomposes cross-country differences in DI participation into (a) overall generosity or budgetary cost of the program, (b) insurance against poor labor market opportunities, and (c) the screening quality of the program. We find large differences in the “efficiency” of such programs.