Using the first 12 waves of the Household, Income and Labour Dynamics in Australia survey, the impact of work‐limiting disabilities on disaggregated labour force choices is investigated. Findings from a dynamic mixed multinomial logit model point to a significant decline in the likelihood of full‐time and part‐time work due to disability. Combined with strong state dependence in employment choices, this suggests a slow recovery from a disability shock. Model simulations suggest that high cross‐ and own‐state dependence can amplify a one‐off disability shock to alter the probability of full‐time employment and non‐participation over a long period, especially for low‐skilled individuals.