Latent Work Disability and Reporting Bias

A measure of true disability is constructed as a continuous index of unobserved work limitation using information from the Health and Retirement Study. Estimates from a simultaneous model of work participation, disability, and income flows suggest that nonworkers tend to substantially overreport limitation, with overreporting most prevalent among nonworking women, high school dropouts, nonwhites, and former blue collar workers. Former white collar workers are found unlikely to overreport limitation. Use of a biased disability measure in the model leads to an upward-biased estimate of the effect of limitation on nonwork and to a downward-biased estimate of the effect of income.