Academic journal article Journal of Legal Economics

General versus the Specific: Forecasting Wage Growth in Injury and Death Cases

Academic journal article Journal of Legal Economics

General versus the Specific: Forecasting Wage Growth in Injury and Death Cases

Article excerpt

Introduction

The human capital theory of income, which is the standard conceptual model for estimating future income and economic loss in cases of personal injury and wrongful death, requires consideration of some seven separate elements (King and Smith 1988). It begins with base year income. This provides a sound and stable foundation to build an estimate of future income. As such, it must be specific to the individual and incorporate the effects of the various factors which determine the individual's productive capacity, such as sex, age, education, experience, occupation, and geographic location. The second step is to project salary increases (or decreases) that the individual could reasonably have anticipated over the remainder of his working life. These increases are the result of three distinct forces: (1) economic progress and increasing productivity, (2) changes due to increasing age and experience, and (3) the individual's ability and accomplishments relative to the average. This paper addresses the appropriate methodology to estimate only the first of these: the growth of real wages resulting from the process of economic growth. The other factors affecting wage growth or the measurement of economic damages are not discussed.

Current Legal and Economic Opinion

Prior to 1980, the predominant practice of forensic economists was probably to estimate nominal wage growth (Deutsch and Raffa 1982). In 1983 the United States Supreme Court found that this practice was acceptable, but, due to the difficulty in predicting inflation rates, opined that it would be preferable to estimate future wages using real growth rates and discount them to present value using real interest rates (Jones & Laughlin Steel Corp. v. Pfeifer 1983). It seems that the predominant practice has shifted to accepting the Supreme Court's suggestion in this matter.' This, however, leaves at issue the question of how to determine the growth rate to apply to future real wages.

In determining the appropriate growth rate, the prevailing view of most courts and economists alike is that statistical evidence concerning growth of a plaintiffs future lost wages be as closely tied to the plaintiffs specific circumstances as possible. Projections should be based on data personal to the plaintiff, including the plaintiffs past work history or, at least, wage trends in the plaintiffs occupation or industry. In a popular forensic economics handbook, the authors state "In our opinion, no better predictor for wage growth of the injured or deceased person exists than the 'track record' of that person" (Brookshire and Smith 1990). The U.S. Third Circuit Court succinctly expressed the predominant judicial position: "Expectancy or statistical data about a group do not establish concrete facts about an individual" (Heckman v. The Federal Press Co.1978). Numerous judicial decisions have approved the use of a growth rate based on the plaintiffs established work history and rejected the use of a national or average growth rate (Courtney v. Safelite Glass Corp. 1922; Harvey v. Traylor 1977; and Scott v. U.S. 1989). Thus, a barber's projected wages should not be based on average wage growth, but on growth of barbers' wages. Better yet, it should be based on the barbers' wages in the plaintiffs hometown. Best, it should be based on the plaintiffs own past wage growth.

The prevailing view is not always adhered to, particularly when no objection is made to the introduction of general statistical wage growth data (Sosa v. M/V Lago Izabal 1984). In addition, a major exception to the general rule exists in cases where the plaintiff is without any work history, such as a young child, student, or housekeeping spouse. Most courts in such cases allow the plaintiff to project a statistical or average earning profile, using general statistical evidence (Childs v. US. 1996; Woods v. Anderson 1978; Kaczkowski v. Bolubasz 1980; Reilly v. US. 1987). …

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