The Impact of Disability Benefits on Labor Supply: Evidence from the VA's Disability Compensation Program

Abstract

Combining administrative data from the US Army, Department of Veterans Affairs, and Social Security Administration, we analyze the effect of the VA's Disability Compensation (DC) program on veterans' labor force participation and earnings. We study the 2001 Agent Orange decision, a unique policy change that expanded DC eligibility for Vietnam veterans who served in theater but did not expand eligibility to other veterans of this era, to assess the causal effects of DC enrollment. We estimate that benefits receipt reduced veterans' labor force participation by 18 percentage points, though measured income net of transfer income rose on average. (JEL H51, I12, I18, J14, J22, J28, J31)