At any given time, individuals may be subject to health shocks whose impact on work
capacity can vary in magnitude. Therefore the variation in severity levels can explain
changes in labour force decisions that can not be picked up by the general disability
status alone. This paper analyses the effect of severity of disability on labour force
participation by using two measures of severity: the self-reported work limitation scales
and the SF-36 physical component summary scores. Using five waves of the Household,
Income and Labour Dynamics in Australia Survey, several static and dynamic panel data
models are estimated to account for state dependence and unobserved heterogeneity in
participation. The results suggest that differences in severity levels explain a significant
portion of the variance in the participation rates among disabled individuals. It is also
found that severe work limitations have a more immediate impact on individuals’ labour
force outcomes. Moreover, the disabilities are shown to have longer lasting adverse
effects on female participation.