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Disability Insurance is a public program that provides income support to persons unable to continue work due to disability. The difficulty of defining disability, however, has raised the possibility that this program may be subsidizing the early retirement of workers who are not truly disabled. A critical input for assessing the optimal size of disability insurance benefits is therefore the elasticity of the labour supply response to these benefits. This parameter has been difficult to estimate in the context of the U.S. disability insurance program, since all workers face an identical benefits schedule. In Canada, however, the existence of separate disability insurance programs for Quebec and the rest of Canada offers an opportunity to examine this parameter.

In January, 1987, disability benefits under the Canada Pension Plan (CPP) were raised by over $150 per month, while benefits were unchanged in Quebec. This study examines the rise in CPP disability benefits relative to the Quebec Pension Plan (QPP) disability benefits using two approaches: a "difference-in-difference" analysis, and a replacement rate model. The results imply an elasticity of labour force non-participation with respect to CPP disability benefits of 0.25 to 0.32.

This sizable labour supply response does not necessarily imply that the rise in CPP disability benefits is bad policy, however. The results of a simple social welfare model show that the value to society from a rise in social insurance benefits can outweigh the costs even with this sizable labour supply response.