Latent Work Disability and Reporting Bias.

ABSTRACT

A measure of "true" disability is constructed as a continuous index of unobserved work limitation using information from the Health and Retirement Study. Estimates from a simultaneous model of work participation, disability, and income flows suggest that nonworkers tend to substantially overreport limitation, with overreporting most prevalent among nonworking women, high school dropouts, nonwhites, and former blue collar workers. Former white collar workers are found unlikely to overreport limitation. Use of a "biased" disability measure in the model leads to an upward-biased estimate of the effect of limitation on nonwork and to a downward-biased estimate of the effect of income.

I. Introduction

Work capacity is an important determinant of labor force behavior, including decisions about when to retire and about whether to apply for disability-related public transfers. [1] Biased survey responses to questions about work limitations, however, may seriously compromise researchers' efforts to accurately measure disability or its role in determining labor force participation decisions. The appropriate use of health measures in participation models has particular relevance for policy since biases in such measures may spill over into inferences about the effects of economic factors, such as program benefit levels, on labor force attachment. Estimates of the sensitivity of work behavior to changes in the design of the Social Security program, for example, may depend on the measure of health used in the analysis.

It is often desirable to have available a summary measure of work limitation (disability), especially given the potentially high computational costs of employing numerous health measures in econometric labor supply models. One purpose of this study is to provide researchers a simple method for constructing a disability index purged of reporting bias related to the work outcome. [2] Another purpose is to measure the degrees to which various types of respondents may overreport disability. Finally, the analysis examines empirically the extent to which overreporting affects inferences about the roles of disability and financial factors on participation outcomes.

Most studies that have included a disability measure to help explain work decisions have employed individuals' self-evaluations of work limitations. [3] A number of writers, however, have expressed concern that self-reports of work limitations may be influenced by work preferences or labor market success (see, for example, Zabalza, Pissarides, and Barton 1980; Myers 1982; Parsons 1982; Chirikos and Nestel 1984; Bazzoli 1985; Bound 1991; Bound, Schoenbaum, and Waidmann 1995; Bound and Burkhauser, forthcoming). Much of the literature suggests that we should be especially skeptical about nonworkers' responses to questions about disability since certain incentives may lead them to systematically overreport the extent to which a health condition limits work capacity. Health-related work limitation may be one of the few socially acceptable reasons for men younger than normal retirement age to be out of the labor force. [4] Moreover, work limitation is fundamentally tied to eligibility for certain types of public t ransfers to the nonworking, such as Social Security Disability Insurance (SSDI) benefits.

Some studies, including Nagi (1979), Stern (1989), and Dwyer and Mitchell (1998) have concluded that such self-reports are reliable. [5] Taking all self-reports of work limitation as accurate, Benitez-Silva et al. (1998) define a respondent in the HRS as "truly disabled" if and only if the respondent classifies himself as unable to work due to a health condition. They then use this classification for coding Type I and Type II errors in the federal adjudication process for disability benefits. Bound and Burkhauser (forthcoming), however, criticize this definition based on the likelihood that "those who apply for SSDI and especially those who are awarded benefits tend to exaggerate the extent of their work limitations (relative to those who do not apply)" (p. 15). In other recent work, O'Donnell (1998) develops a work participation and limitation model that allows for the possibility that a health condition completely precludes the possibility of work instead of merely altering expected income flows and tastes for leisure. Based on his estimates, he rejects the hypothesis that self-reported work capacity is reliable. Kerkhofs and Lindeboom (1995) conclude that reporting errors depend systematically on labor market status.