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We use matched employer-employee data from Finland to model transitions out of work into sick leave and disability retirement. To identify the role of institutional factors we exploit a law change that made the medical requirements for disability pension eligibility tougher for a certain group, as well as partially experience-rated employer contributions that vary with the firm size. We find evidence that employers do exploit disability retirement as a way of adjusting their workforce, and that this behaviour depend on the stringency of medical screening and the degree of experience rating.

Institutional Rules, Labour Demand and Disability Programme Participation