A burden too big to bear? The effect of experience‐rated disability insurance premiums on firm bankruptcies and employment*

Abstract

We study whether experience rating for disability insurance (DI) affects the labor costs of firms and the probability of bankruptcy. The experience rating requires firms to contribute to the DI benefit costs of their workers. We use matched worker–firm data of the Netherlands, where the DI premium of firms is a function of historic disability risks. To measure the effect of experience‐rated premiums, we exploit exogenous changes in the schedule that determines the firms’ DI premiums. We find that higher premiums increase not only labor costs but also the probability of firm bankruptcy. These effects are concentrated on small firms.