Firm Accommodation After Disability: Labor Market Impacts and Implications for Social Insurance

This paper studies the labor market impacts of firm accommodation decisions and assesses implications for the design of social insurance for workplace disability. To do so, it uses a unique workers’ compensation (WC) program in Oregon that provides wage subsidies to firms for accommodating injured workers. Exploiting rich administrative data and a policy change to the wage subsidy, it shows that accommodation rates respond to the subsidy rate and that receipt of accommodation leads to a significant increase in employment and earnings a year later. To explore welfare implications, it develops and estimates a frictional labor market model of accommodation as a form of human capital investment. Worker turnover and imperfect experience rating in WC lead to under-accommodation and inefficient labor market outcomes after workplace disability. Counterfactual simulations show that subsidizing accommodation not only improves long-run labor market outcomes of workers experiencing work-related disability but also leads to welfare gains for most workers.