MEASURING EARNINGS LOSSES AND REPLACEMENT RATES
The goal of this analysis is to measure the adequacy and equity of workers compensation benefits for workers with permanent disability claims. In order to accurately measure adequacy, the benefits received must be compared with some estimate of earnings losses from a permanently disabling workplace injury. These losses can be thought of as twofold: the lost earnings while an injured worker is out of work and receiving temporary disability benefits, and the additional losses associated with the permanent residual impairment that qualifies the worker for permanent disability benefits.
Our efforts in measuring permanent losses are motivated by the stated purpose of the workers compensation permanent disability benefit in California: It is compensation for the diminished ability of such injured employee to compete in an open labor market. 1 We assume that this diminished ability may result in lower earnings due to both increased time out of work after the injury and lower wages. We therefore estimate the total lost earnings after injury and compare the lost earnings to the benefits received.
To help illustrate our approach to estimating losses, Figure 2-1 presents hypothetical losses from a permanently disabling workplace injury. The dotted line represents potential uninjured earnings or the earnings the worker would have received if the injury had not occurred. This line moves upward with time to represent the increased earnings associated with increasing experience in the labor market or increasing tenure at the employer. The solid line represents the observed earnings of the injured worker. At the time of injury, the worker receives no earnings for some time while recovering from the injury. This is the period during which temporary disability benefits are received.
At some point, the worker returns to work, perhaps in some modified capacity. In the example in Figure 2-1, the worker returns at a wage that is lower than what she received prior to injury. We then observe her wages increasing over time and converging toward the wages she would have received had she not been injured. However, in this example, we do not observe full wage recovery, and at the end of the observed period, the worker makes more than she made prior to injury, but not as much as she would have made if she had not been injured.____________________