Veterans' Labor Force Participation: What Role Does the VA's Disability Compensation Program Play?

Military engagements since the early 2000s have brought renewed public interest to issues involving the US military and its veterans. Yet the stark differences in the labor market experiences of veterans and nonveterans have received fairly little attention. In 2013, the labor force participation rate for male veterans ages 18 to 64 was 76.1 percent, significantly lower than the 82.0 percent rate for nonveteran males in this same age range (Bureau of Labor Statistics 2014). The difference in their employment rates was similarly large. Many factors may contribute to low rates of employment among veterans. The veteran population may be older or less educated than the nonveteran population. Veterans may have been more affected by the recent recession if they are concentrated in cyclical industries or have shorter job tenure. Military service also carries a risk of incurring physical or mental health problems that may make employment more difficult. Another factor worthy of consideration is the US Department of Veterans Affairs Disability Compensation (DC) program, which pays benefits to veterans with medical conditions caused by or aggravated during military service. Since 2001, the DC program has experienced rapid growth, due in part to liberalization of the medical eligibility criteria (Duggan, Rosenheck, and Singleton 2010). The number of DC beneficiaries rose from 2.3 million in 2000 to 3.7 million in 2013, while DC expenditures (in 2013 dollars) grew even faster, from $20 billion to $54 billion (Congressional Budget Office 2014; Veterans Benefits Administration 2013). While a large body of literature has investigated the effect of the Social Security Disability Insurance (SSDI) program on labor supply, there are few studies of the DC program. One such study is Autor et al. (2014) who use an expansion in DC eligibility that affected only Vietnam-era veterans who had “ boots-on-the-ground” (BOG); they find that DC enrollment surged and labor force participation fell among BOG veterans relative to Vietnam-era veterans without boots on the ground. Further research on the DC program is clearly warranted given the program’s size—about 40 percent as large as the SSDI program in terms of number of beneficiaries and total program expenditures. In this paper, we explore trends over time in the labor force participation of veterans as compared to nonveterans, investigating whether there are patterns consistent with an increasingly important role for the DC program. We also examine whether veterans are more responsive to economic shocks than nonveterans, and whether this relationship has strengthened as the DC program has grown. We estimate labor force participation regressions using 35 years of data from the March Current Population Survey. We have two primary findings. First, we find that the labor force participation rate of veterans has been declining over time in a way that coincides closely with the growth of the DC program. Second, we find that veterans have become more sensitive to economic shocks than nonveterans in recent years, as the DC program has grown.