HYSTERESIS: EVIDENCE FROM THE SOCIAL SECURITY DISABILITY PROGRAM DURING THE JOBLESS RECOVERY by Chunling Peng A dissertation submitted to the Faculty of the University of Delaware in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Economics Spring 2020 Copyright 2020 Chunling Peng All Rights Reserved HYSTERESIS: EVIDENCE FROM THE SOCIAL SECURITY DISABILITY PROGRAM DURING THE JOBLESS RECOVERY by Chunling Peng Approved: __________________________________________________________ Michael A. Arnold, Ph.D. Chair of the Department of Economics Approved: __________________________________________________________ Bruce W. Weber, Ph.D. Dean of Lerner College of Business and Economics Approved: __________________________________________________________ Douglas J. Doren, Ph.D. Interim Vice Provost for Graduate & Professional Education and Dean of the Graduate College I certify that I have read this dissertation and that in my opinion it meets the academic and professional standard required by the University as a dissertation for the degree of Doctor of Philosophy. Signed: __________________________________________________________ James L. Butkiewicz, Ph.D. Professor in charge of dissertation I certify that I have read this dissertation and that in my opinion it meets the academic and professional standard required by the University as a dissertation for the degree of Doctor of Philosophy. Signed: __________________________________________________________ Desmond Toohey, Ph.D. Member of dissertation committee I certify that I have read this dissertation and that in my opinion it meets the academic and professional standard required by the University as a dissertation for the degree of Doctor of Philosophy. Signed: __________________________________________________________ SeonYoung Park, Ph.D. Member of dissertation committee I certify that I have read this dissertation and that in my opinion it meets the academic and professional standard required by the University as a dissertation for the degree of Doctor of Philosophy. Signed: __________________________________________________________ Saul Hoffman, Ph.D. Member of dissertation committee ACKNOWLEDGMENTS I wish to thank the people, my adviser, James L. Butkiewicz; my committee member Desmond Toohey, SeonYoung Park, and Saul Hoffman. I must also thank my spouse, Cheng Liu, my parents and my two daughters, without whom none of this would ever been possible. iv TABLE OF CONTENTS. LIST OF TABLES……………………………………………………..….....viii LIST OF FIGURES………………………………………………..………….ix ABSTRACT………………………………………………………………….....xi Chapter 1 INTRODUCTION………………………………………………………..1 1.1 The Jobless Recoveries and Hysteresis……..….……...……….1 1.2 Hysteresis and Disability………...………………...…………….2 1.3 Methodology & Identification………….………..……………….4 1.4 Implication…………………...……..……………….……………...6 2 BACKGROUND………………….………………………………………7 2.1 Introduction of Hysteresis Theory……..…………………….….7 2.2 The Relationship Between Hysteresis & Disability Programs.…………………………………………………………...8 2.3 Early Development of the DI Program..…………..………..…..9 2.4 Liberalization in 1984….……..….…...…………………..……..10 2.5 Hysteresis and the Jobless Recovery…...........................……12 3 LITERATURE REVIEW…………………...…………………………14 3.1 Hysteresis Literature…...…..………………………..…..……...14 3.1.1 Hysteresis Theory Research…………..….….…..…....14 3.1.2 Hysteresis Evidence: Unemployment Persistence....18 3.1.3 Hysteresis & Institutions……………………………...22 3.1.4 Recent Development…………......……………..………25 3.2 Disability Literature……….………..…………………………..26 3.2.1 DI Program and Labor Market Conditions.……..….26 3.2.2 The Liberalization in 1984….…………………..……..28 3.2.3 DI Program and Labor Participation……..……...…30 4 HYSTERESIS IN DISABILITY OF LOW-SKILLED WORKERS…………………………………………………………..….37 4.1 Introduction….…...…...………..……………...………………….37 v 4.2 Empirical Strategy….....……...……….…………………………39 4.2.1 Specification………….….…...…………..……………….39 4.2.1.1 The Difference-in-Difference Model………....40 4.2.1.2 Difference-in-Difference with Instrument….42 4.2.1.3 Difference-in-Difference with Instrument and FE………………………………………………...44 4.2.2 Data…….………..………….………..………...…………44 4.2.3 Pre-Treatment Comparison...…………….……………47 4.3 Empirical Results.…………....……….…………..….………..49 4.3.1 Hysteresis in Disability……………..…………………49 4.3.1.1 Positive Cyclical Shocks………….....…..……50 4.3.1.2 Existence of Insider-Outsider Mechanism: The Membership Rule and Benefit Premium………………………………………..52 4.3.1.3 Negative Structural Shocks…..……...…..…53 4.3.2 Comparisons with Existing Literature……..……….54 4.4 Conclusion………………….……...…….……………………….56 4.4.1 Robustness Check…………………………….………...56 4.4.2 Conclusion……...…….………..………...……………....57 5 HYSTERESIS IN DISABILITY OF OLDER WORKERS………..58 5.1 Introduction…………..….……………..…..…….…………….....58 5.2 Empirical Strategy…………...……………...…………………...61 5.2.1 Specifications……..………...………..…………………...61 5.2.1.1 The Difference-in-Difference Model……........62 5.2.1.2 Difference-in-Difference with Instrument.....64 5.2.1.3 Difference-in-Difference with Instrument and FE..………………………………………....……..65 5.2.2 Data…….………...…………….………..…….…...……...66 5.2.3 Pre-Treatment Comparison…….………..…..…….…...69 vi 5.3 Empirical Results…….………….…………..……………………71 5.3.1 Hysteresis in Disability………….….…………...…………71 5.3.1.1 Positive Cyclical Shocks………….……………….72 5.3.1.2 Existence of Insider-Outsider Mechanism: The Membership Rule and Benefit Premium.……...74 5.3.1.3 Negative Structural Shocks…………..……….....75 5.3.1.4 Labor Institution……………..…..………..….......76 5.3.2 Comparisons with Existing Literature………………......76 5.4 Conclusion………………….…..………….……………..……….....79 5.4.1 Robustness Check……..………………………..……………79 5.4.2 Conclusion…………………………………………...…..……79 6 CONCLUSION…………………………….…..………...…………...…81 FIGURES & TABLES…………………………………………………………….....86 REFERENCES………………………...…………………………………...…….....148 Appendix A BARTIK STATE-LEVEL LABOR DEMAND INSTRUMENT…......157 vii LIST OF TABLES Table 1: Variables & Description……......………………………………............100 Table 2: Summary of Variables………..…………………………………..…….103 Table 3: Disability Rate for Control & Treatment Group from 1980 to 2016……….…………………………...………………………………..106 Table 4: Summary Statistics for Control & Treatment Group.………………………………………………………………..…109 Table 5: Summary Statistics for Control & Treatment Group Pre- treatment…………............................……………………………….111 Table 6: Hysteresis in Low Skilled Workers………..……………..……….....113 Table 7: Hysteresis in Low Skilled Workers (Robustness Check)….……...115 Table 8: Variables & Description...……...…….……………………………..…126 Table 9: Variables & Description……………...……………………………..…129 Table 10: Disability Rate for different age cohorts from 1980 to 2016…....132 Table 11: Disability Rate for Control and Treatment group from 1980 to 2016……………………………………………...……………………...134 Table 12: Summary Statistics for Control & Treatment Group…………………………..………………………………………..136 Table 13: Summary Statistics for Control & Treatment Group pre-treatment 1984 liberalization...…………………..……………………………138 Table 14: Summary Statistics for Control & Treatment Group pre-treatment (2000 NRA)……..…….…………………..…………………………….140 Table 15: Hysteresis in Older Workers……….……….……………………….142 Table 16: Hysteresis in Older Workers (Robustness Check)……..……..….145 viii LIST OF FIGURES Figure 1: Recovery Index of Real GDP. U.S. Post-War Recessions…..….......86 Figure 2: Recovery Index of Unemployment Rate. U.S. Post-War Recessions……….……………………………………………………...88 Figure 3: Recovery Index of Labor Force Participation Rate. U.S. Post-War Recessions………….…………………………………………………...90 Figure 4: Labor Participation Rate and Employment Population Ratio of United States from 1948 to 2016..……..……………………………....92 Figure 5: Timeline and Events of DI Program & New Benefit Awarded.......93 Figure 6: Yearly Flow-in Disabled Population Ratio & Disability Employment Ratio……...…..………………………..........................94 Figure 7: Disabled population from year 1957 to 2014……………...…….......95 Figure 8: Disabled Employment Ratio 1957 to 2014……….....………...........96 Figure 9: Application Waiting Time (Months) of all Stages………...….…......97 Figure 10: Application at All Adjudicative Levels……….…….………..……….……..98 Figure 11: Application at Different Stages…………….………..…..…………………..99 Figure 12: Disability Rate for Control & Treatment Group from 1980 to 2016………………………….…………………………………………108 Figure 13: Unemployment Rate by State…….….………………..…………....116 Figure 14: Employment Population Ratio by State…….……...………….….118 Figure 15: Replacement Rate by State………...….………………………….…120 Figure 16: Employment in Agriculture by State………..…..………………...122 Figure 17: Employment in Manufacturing by State……………......………..124 Figure 18: Disability Rate for different age cohorts from 1980 to 2016…...133 ix Figure 19: Disability Rate for different age cohorts from 1980 to 2016 (Control & Treatment Groups)………………….........……………135 x ABSTRACT This paper studies the “hysteresis” in the SSDI (Social Security Disability Insurance) program from 1980 to 2016 by comparing different models using CPS (Current Population Survey) annual data with six million observations. The Social Security Disability Benefits Reform Act of 1984 is used as an exogenous shock to create a unique natural experiment. Using the difference-in-differences with instrumental method and fixed effects, it is shown that demographics, education, marriage, number of children, benefit premium, membership rule and structural shocks are causal to the degree of hysteresis. My findings provide an important