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New Study Shows Earnings Losses Persist Much Longer After Work-Related Injury, Even for Minor Injuries

September 24, 2014 (8 min read)

Income benefits paid to workers through the workers’ compensation system replace a smaller fraction of lost income benefits than previously believed

Thomas A. Robinson, J.D., the Feature National Columnist for the LexisNexis Workers’ Compensation eNewsletter, is a leading commentator and expert on the law of workers’ compensation.

Filling in gaps from earlier studies conducted by others, a group of researchers has released the findings of a significant new study showing persistent earnings losses for workers up to 10 years following a work-related injury, even for comparatively minor injuries. Moreover, the study reveals that income benefits paid to workers through the workers’ compensation system replace a smaller fraction of the lost income benefits than previously believed. [See Seabury, SA et al., “Using Linked Federal and State Data to Study the Adequacy of Workers’ Compensation Benefits,” American Journal of Industrial Medicine vol. 57, pp. 1165–1173, Oct. 2014].

Limitations of Prior Studies

Past studies from U.S. jurisdictions have generally found that injured workers experience significant losses from work-related injuries and that on average the replacement of lost earnings is low. Those past studies faced data limitations, however. For example, most of the studies relied on earnings information from state unemployment insurance (UI) records. While UI data provide rich information on wage and salary income within a given state, they do not include any earnings from outside the state nor do they include self-employment earnings. If injured or disabled workers are more or less geographically mobile than comparison workers, or if they are more or less likely to engage in self-employment, this could lead to biased estimates of earnings losses. The past studies have also generally lacked information related to the worker’s earnings beyond 5 years after injury. Most workers’ compensation indemnity benefits are usually fully paid within the first 5 years, so if earnings losses persist, the effective replacement rates would decline even more over time. While several studies have investigated the adequacy of compensation in the long term, they have been forced to extrapolate earnings losses based upon 5 years of post-injury data.

Study Methodology

The Seabury research takes advantage of a unique dataset linking state workers’ compensation data from New Mexico to federal earnings data from the Social Security Administration (SSA) and the Internal Revenue Service (IRS) for 3 years before and up to 10 years after a workplace injury. The dataset addresses both gaps in prior research noted above, allowing the researchers to evaluate the long-term earnings losses and replacement rates of injured workers and test for systematic differences in self-employment before and after an injury.

The New Mexico Workers’ Compensation Administration (WCA) provided the researchers with data on all cases with injury dates from 1992 through 2001 for which workers’ compensation benefits were paid—a total of 214,230 cases. The data included information on the characteristics of the injured worker, the injury and the employer, compensated time lost from work, and benefits paid. From 1992 through 2001, there were 63,689 lost-time cases (30% of the total). Based upon prior research, the researchers classified temporary disability (TD) cases into two groups: those missing less than 8 weeks and those absent 8 weeks or more. For descriptive purposes, the researchers describe these as moderate and severe temporary injuries, respectively.

The researchers noted that 38% of the injured workers had more than one workplace injury from 1992 through 2001. The study sought as far as possible, therefore, to consider the fact that an earlier injury by a worker might causally affect the occurrence and impact of subsequent injuries. Using validated Social Security Numbers (SSNs), the researchers linked each worker to his or her Detailed Earnings Record from Social Security’s Master Earnings File, retrieving annual earnings through the end of 2007. Since some workers might have more than one employer, or enjoy some self-employed income during the period, the researchers utilized a set of determinants to determine the “employer of injury.” The researchers used WCA data related to the medical-only cases to produce a comparison group of workers whose long-term earnings were unaffected by workplace injuries and yet, who are similar to the injured workers. The underlying assumption was that any earnings losses associated with medical-only injuries are minor and should not have a substantial association with earnings over a 10-year period. The researchers used a number of covariates to increase the accuracy of their regression analysis. Because workers’ compensation benefits are not taxed, the researchers estimated both the before-tax and after-tax replacement rate.

Study Results: Key Findings

The Seabury group found substantial and persistent earnings losses in the post-injury period. For example, on average, PPD lost-time injured male workers cumulatively earned $58,122 less over 10-years than if they had not been injured. Even in their 10th year after injury, they earned $4,898 (15%) less than comparison workers. The researchers also found that self-employment earnings did not play a significant role in the recovery of injured workers.

The researchers indicated their findings are consistent with a number of other identified studies using UI data. Generally speaking, the researchers found:

> Even considering their favorable tax treatment, workers’ compensation indemnity benefits replaced less than 20% of lost earnings on average for both men and women.

> The 10-year, after-tax replacement rate of lost earnings was less than 40% in all cases.

> For the moderate temporary injuries, replacement rates were less than 5%.

> Replacement rates were equally low for men and women.

Given these results, the researchers posit that their study provides some validation that UI data can provide reasonable estimates of replacement rates, despite its limitations.

The researchers noted that past work had demonstrated that early and sustained return to the at-injury employer is among the best available options to mitigate future earnings losses, that while New Mexico encourages worker retention by subjecting at-injury firms to potential fines if they do not offer re-employment, it remains unclear how often such fines are levied. The researchers conclude, therefore, that one method to improve after-tax replacement rates might be to actively enforce these measures or follow the model of other states, like Washington and Oregon, who subsidize the employers who rehire and accommodate injured workers. An obvious alternative, of course, would be to increase workers’ compensation benefits.

Limitations of Study

The study acknowledges that it has limitations. For example, the researcher’s sample came from a single small state that is poorer than the national average and might have different labor market opportunities for injured workers, limiting the generalizability of the findings. The researchers also noted that their data was relatively old; it could not consider the implications of changing labor force conditions facing disabled workers in the wake of the Great Recession. The researchers also observe that they had only limited information on the severity of injury. The researchers posit, however, that almost all these limitations could be addressed with further research linking workers’ compensation from different states to comprehensive, federal earnings data. Doing so would provide policymakers across the U.S. with important information about the adequacy of workers’ compensation benefits for injured workers in their states.

The study appears to make no mention of litigation costs associated with the injured worker’s securing of his or her workers’ compensation benefits. Where these costs, particularly attorney’s fees, are paid from the benefits themselves, it would appear that the researchers understate the deficit in income enjoyed by the injured worker.

The Grand Bargain Is Out of Equilibrium

An important part of the “grand bargain” between employers and employees within the workers’ compensation arena is the idea that just as the wear and tear on an employer’s machinery ought to be reflected in the price of the employer’s goods or services, so also should the wear and tear on the employer’s work force. A product’s price should reflect the total cost of production, including the costs associated with work-related injuries and illnesses. The Seabury study adds weight to the argument that the grand bargain is out of equilibrium, that workers’ compensation benefits do not adequately replace what a worker loses through his or her injury, that the physical and economic costs associated with work-related injuries and illnesses are not being fully addressed, and that the injured worker is at least partially subsidizing the overall cost of America’s goods and services with his or her lost income.

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Attorney Perspective: Attorney Chuck Davoli, managing partner of Davoli, Krumholt & Price, Baton Rouge, Louisiana, and President of Workers’ Injury Law & Advocacy Group (WILG) states, “The ‘Seabury’ research model, although limited to a single atypical state, reveals a new and potentially more reliable methodology to assess the long-term effects of wage loss being experienced by injured workers. Simply by analyzing post-work accident SSA and IRS earnings data, when compared to pre-accident earnings history, a statistically valid pattern of wage loss apparently emerges, which is contrary to previous findings when analyzing only post-accident state UI data. To those of us representing injured workers, especially more seriously injured workers who are unable to return to their prior occupations, these findings come as no surprise. Unfortunately, most state workers' compensation systems, unlike Federal programs, like the Longshore and Harbor Workers' Act, have reduced duration or completely eliminated so-called ‘wage-loss’ indemnity benefits attributable to a prior work accident once a disabled worker returns to an alternative or modified occupation and reduced earnings. In recent years, most state systems have side-stepped this inequity by merely adopting a scheme imposing a permanent impairment rating upon the ‘permanently’ partially-disabled worker once they reach their often questionable MMI status and then cashing them out of the system for a minimal percentage of their future wage loss. Such WC practices eliminating reasonable consideration of the long-term impact of future wage loss, is not only further evidence of the erosion of the so-called ‘equilibrium’ originally envisioned in a balanced WC system, but is further repudiation of the principles of reasonableness articulated in the 1972 President's Commission on WC Report findings, wherein elimination of arbitrary limits on duration or total sum of benefits were concluded. Again, evidence is slowly emerging of the breech of the quid pro quo origin of WC systems, and the reality that 14th Amendment considerations, like the recent Padgett v. State of Florida case, are like an iceberg slowly drifting towards state WC systems. One other interesting revelation of this study provides the prospect that the ‘Seabury’ methodology could be possibly be used to study the impact, if any, of so-called ‘cost-shifting’ of WC liability from the private to public sector or other alternative benefit systems; including, the impact on SSI, SSDI or ERISA type systems."

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