Disability benefits and hidden unemployment in the Netherlands

This paper explores the consequences of lower disability benefits on the nu mber of people in disability schemes and unemployment schemes. In particula r, a principal agent model is developed in which a control agency assigns e ither disability benefits or unemployment benefits to jobless workers. As t he control agency (the agent) takes the interest of both the government (th e principal) and the worker into account, there is a possibility of imprope r use of disability schemes by so-called hidden unemployed. The model is es timated in error correction form by using Dutch data. We find that approxim ately 50 percent of disability benefits in The Netherlands is due to improp er use. The partial framework is linked to an applied general equilibrium m odel for the Dutch economy, labeled MIMIC. Accordingly, we are able to expl ore the effects of lower social benefit levels on official and hidden unemp loyment. More specifically, lower benefit levels may exert, first, a substi tution effect between unemployment schemes and disability schemes and, seco nd, a scale effect on total unemployment through several general equilibriu m mechanisms. Simulations suggest that reducing disability benefits by 5 pe rcentage points while maintaining unemployment benefits will reduce total u nemployment by 0.7 percent. Almost half of this reduction is due to lower h idden unemployment. Reducing unemployment benefits by 5 percentage points w hile keeping disability schemes unaffected, raises hidden unemployment slig htly while reducing total unemployment by 0.8 percent. (C) 1999 Society for Policy Modeling. Published by Elsevier Science Inc.