What happens to the employment of disabled individuals when all financial disincentives to work are abolished?

Policymakers and organizations representing people with disabilities have highlighted the importance of promoting the employment prospects of disabled individuals as a determinant to ensure their broader integration into the society. Policy reforms that attempt to incentivise disabled individuals to work typically involve reduced financial punishments for earning above a predetermined threshold (substantial gainful activity). This paper exploits a Spanish reform that entirely eliminated any disincentives for disabled individuals to work. Partially disabled individuals in Spain are subject to income taxation in all regions except in the province of Bizkaia. Before 2007, partially disabled individuals in Bizkaia were exempt from income taxation if they did not work. In December 2006, a new law was passed in Bizkaia that distinguished between individuals aged 55 or younger, who were no longer tax-exempt, and those who were older than 55 years, who continued to be tax-exempt if they did not work. I exploit this change in the legislation and employ both a difference-in-difference strategy comparing the employment outcomes of disabled young men across provinces and time as well as a triple difference model with disabled men older than 55 years, who are unaffected by the policy. My results show that the reform increased the probability of working by 6.5 percentage points for disabled men aged 55 or younger.