Disability Insurance as a Complement to Labor Income: Evidence From Italian Administrative Data

We investigate how disability insurance (DI) generosity affects DI take-up and labor market participation in a setting where benefits can be cumulated with substantial labor earnings. Using rich administrative data on Italian private-sector workers and a Regression Discontinuity in Time design, we find a large behavioral response to DI generosity, with an elasticity of 1.26 in DI take-up, while employment effects are minor and concentrated among immigrants. Our identification strategy exploits a major social security reform that reduced the expected DI replacement rate and generated a clear income effect. To address unobserved heterogeneity and the unobservability of underlying disability, we focus on individuals affected by acute cardiovascular shocks whose DI eligibility is plausibly exogenous. Overall, our results suggest that when earnings cumulability is extensive, DI is widely perceived as a complement to labor income. This has important implications for the design of labor-inclusive DI schemes.