Firm Accommodation and the Design of Social Insurance

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This paper studies the labor market impacts of firm accommodation decisions in response to worker productivity shocks and assesses the role of firms in the design of social insurance programs. Our empirical context is workplace disability, where we leverage detailed administrative data about workplace disability, firm accommodation, and wages from a workers’ compensation program in Oregon that provides wage subsidies to firms for workplace accommodation. Exploiting a policy change to the wage subsidy, we find that a 5 percentage point decrease in the wage subsidy rate led to a significant decrease in accommodation and corresponding negative effects on employment and earnings. To interpret these findings, we develop a frictional labor market model with workplace disability and firm accommodation in which accommodation affects the future productivity of injured workers. Worker turnover and imperfect experience rating can lead to under-accommodation and inefficient labor market outcomes after workplace disability. We identify and structurally estimate our model by exploiting our estimates based on wage subsidy changes. Counterfactual analyses show that a wage subsidy of 40% maximizes overall worker welfare.