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Institutional rules, labour demand and retirement through disability programme participation


We use matched employer–employee data from Finland to model transitions out of work into sick leave and disability retirement. To identify the role of institutional factors, we exploit reforms that changed medical requirements for disability pension eligibility and experience-rated employer contributions. We find that transitions to sick leave and disability pension benefits are relatively rare in growing establishments, but rather common in establishments with a high degree of excess worker turnover. We also show that transitions to disability retirement depend on the stringency of medical screening and the degree of experience rating applied to the employer.

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  1. See McVicar (2008) for discussion about the growth in disability benefit rolls in the UK.

  2. They also find an increase in mortality rates among workers whose plants downsized.

  3. Disability schemes represent only a part of the social security system. How people who are unable, or unwilling, to work are allocated between sickness, unemployment, disability and early retirement schemes depends on relative compensation levels and eligibility criteria, which vary from country to country. Hence, a low disability enrolment rate may be associated with a high rate of sickness absence, long-term unemployment or voluntary early retirement. This kind of spillovers should be kept in mind when interpreting the results from cross-country comparisons.

  4. The target population of the survey was all people who received early retirement benefits at the end of 1998. The early retirees were asked for their reasons of retiring. The response rate was quite low—only 51.3%—and young disability pensioners were under-represented. The numbers referred to in the text were taken from Table 12 in Saurama (2004, p. 132).

  5. We obtained the values of γ from a pension institution. The same values are used by all the pension institutions. The multiplier is basically determined by the average duration of disability pension receipt of persons who are granted a disability pension at a given age. It also accounts for the (average) probability that the person returns to work and the (average) survival probability until age 65.

  6. It is worth noting that the Finnish experience rating system differs from the Dutch one studied by Koning (2009) at least in the following ways: (1) the employer’s liability is not limited to the first 5 years of disability benefit costs, (2) the disability event causes a lump-sum payment, having no effect on the pension contributions thereafter, and (3) the degree of experience rating varies much more across firms of different size.

  7. The ordinary old-age pension was available for people older than 61 but only those entering at age 65 received the full benefits. Since 2005, employees have been able to choose freely at which age between 63 and 68 they begin to collect the old-age pension benefits.

  8. Statistics Finland changed its procedure of merging register data on pension benefits in 1995. This led to an unexplained (small) drop in the number of disability pension recipients in the FLEED for that year, reflecting some technical problems. For that reason, we chose to break the time series in 1995.

  9. The cost of a disability pension is borne by the former employer (according to the experience-rating rules concerning firm size) only when the employment relationship has lasted for a minimum of 3 years. We also include workers who changed their jobs within the 3-year period but control for job tenure in the probability models. Excluding these workers from the analysis does not notably affect our results.

  10. Our results for transitions from work to disability retirement are not sensitive with respect to this restriction. We exclude those on sickness benefit in year t − 1 to be able to analyse also the entry rate into sick leave.

  11. Receipt of a disability pension is not observed for some people in 1995 due to the change in the procedure of merging the underlying register data. Using the 3-year moving window for transitions to disability pension also minimizes this problem.

  12. A recent study by Gielen and Van Ours (2006) analyses age differences in job reallocation and labour mobility using matched worker–firm data for The Netherlands. They find that firms adjust their workforce mainly via entry for young and prime-age workers but via separations for older workers. Furthermore, employment of old workers is found to be more responsive to firm-specific employment changes.

  13. The risk group for transitions from sick leave to disability retirement is different from that for other transitions, and thereby the marginal effects are evaluated at the different values of the covariates. This does not, however, alter our interpretation of covariate effects.

  14. This is not an accurate measure because the waiting time until the receipt of sickness benefits from KELA can vary between employees and because the amount of a sickness benefit is determined as a decreasing fraction of the past earnings.

  15. The disability costs are estimated using the formula in Eq. 1. Since the true level of the disability pension benefit is not known, we assume the pension benefit would be a fixed percent (55%) of the annual earnings.

  16. Should we exclude the disability cost from the model, there would be a large effect of firm size on the transition rate from sick leave to disability retirement. For the employees of the two largest employer groups, the odds of moving from sick leave to disability retirement would be about 0.66, corresponding to a decrease of 9 percentage points in the disability probability for the average recipient of sickness benefits.

  17. It is not clear at which point the employers became aware of the new experience rating scheme before the law changes. The reforms may also have induced some sort of anticipationary behaviour just before the new rules came into effect. However, if we drop 1 or 2 years preceding the reforms from the analysis, our results do not change notably.

  18. There are a few extreme values for the equity ratio. To deal with such outliers, we bottom coded and top coded the equity ratio at the 5th and 95th percentiles, respectively. That is, we use the threshold values for observations below the 5th percentile or above the 95th percentile.

  19. Excess worker turnover in year t is defined as \(h_{t}+s_{t}-\left\vert \Delta e_{t}\right\vert ,\) where h t and s t denote the number of hires and separations during year t, respectively, and Δe t is the employment change from the end of year t − 1 to the end of year t in a given establishment. This quantity is the worker flow in excess of what is needed to explain the net change in the size of establishment’s workforce. Dividing it by the average employment level at the end of years t − 1 and t, say \(\overline{e}_{t},\) gives the excess turnover rate: \( (h_{t}+s_{t}-\left\vert \Delta e_{t}\right\vert )/\overline{e}_{t}\), which takes a value on the interval \(\left[ 0,2\right]\). To smooth annual variation, we take the average of the excess turnover rates between years t − 4 and t − 1 (for the past period) and between years t − 1 and t + 2 (for the current period).


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Financial support from the Finnish Centre for Pensions is gratefully acknowledged. We are grateful to Mikko Kautto, Raija Gould and Juha Rantala for helpful comments and to Tuuli Ylinen and Eija Mustonen for research assistance. Comments of two anonymous referees and a co-editor substantially improved the paper.

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Correspondence to Tomi Kyyrä.

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Responsible editor: James Albrecht

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Korkeamäki, O., Kyyrä, T. Institutional rules, labour demand and retirement through disability programme participation. J Popul Econ 25, 439–468 (2012).

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  • Disability pension
  • Sick leave
  • Experience rating

JEL Classification

  • J14
  • J23
  • J26