The influence of economic incentives on reported disability status

Self‐reported disability status is often relied upon in labour force participation models, but this may be reported with error for economic or psychological reasons and can lead to a bias in the effect of disability on participation. In this paper, we explore the possibility that reported limitations in daily activities are mis‐reported, in particular for those who define their labour force status as disabled/ill, and assess if economic incentives influence this group to mis‐report. The main questions we wish to address therefore are: (1) was there state‐dependent reporting error and did economic incentives play a role, and (2) did this change over the years 1995–2001? Using a generalised ordered response model, we compute cleansed measures of disability that correspond to predicted responses individuals would have made if employed. Unobserved differences between the employed and non‐employed may exist; therefore, we control for this via correlated random effects. The results indicate that the disabled/ill group did over‐report and the difference between actual and predicted probabilities only marginally changed between 1995 and 2001. The extent of this measurement error is lower once we control for unobserved heterogeneity. Copyright © 2008 John Wiley & Sons, Ltd.