The Effect of Changes in Local Labour Market Conditions on Disability Benefit Take-Up : Evidence From Norway

Abstract

This master’s thesis examines the impact of changes in local labour market conditions on disability benefit take-up, particularly focusing on the 2014 oil price decline. Using municipality-level data for Norway from 2009-2021, the study employs a Two-Stage Least Squares methodology with instrumental variables to explore the relationship between changes in employment and disability benefits. A Difference-in-Difference and Event Study approach is applied to analyse the effects of the oil price decline in 2014 on disability benefits. This event significantly affected employment in Norwegian municipalities with a high dependence on the oil industry. By differentiating municipalities based on their level of oil workers, I investigate if the municipalities most dependent on the oil industry experienced a higher increase in benefit take-up compared to other municipalities postevent. The Two-Stage Least Squares results reveal a significant inverse relationship between employment levels and disability benefit take-up with an elasticity of -1.454. The findings from the Difference-in-Difference and Event Study indicate that the decline in oil prices in 2014 led to a more pronounced increase in benefit recipients in municipalities with higher levels of oil workers, with a delayed effect that remained for several years after the event. The results indicate that economic shocks to local economies can increase disability benefits take-up. This suggests that for some individuals, disability benefits may function as a substitute for employment during economic downturns.