4. Wage Loss Study

Our wage loss study is central to evaluating the treatment of PPD claims. California law states that the amount of PPD benefits should reflect injured workers' reduced ability to compete in an open labor market, a competitive disadvantage that should be reflected in a reduction of post-injury income derived from wages. The amount of this wage loss provides a potential empirical measure of disability: the larger the percentage of wages that a worker loses after injury, the larger the disability. Analyses of wage loss also provide an empirical measure of the adequacy of workers' compensation benefits--that is, the fraction of a worker's wage loss that is replaced by such benefits.

To investigate these issues, we obtained California Employment Development Department (EDD) data on quarterly earnings between 1989 and 1996 for 30,000 PPD applicants who had workplace injuries between 1991 and 1994. These data provided several years of information about each worker's earnings both before and after the injury. We then linked the EDD wage data for each worker to Workers' Compensation Insurance Rating Bureau (WCIRB) data on disability ratings, date of injury, and benefits paid.

The wage loss analysis requires comparing an observable number--workers' actual post-injury wages, which we obtained from the EDD--with an unobservable, hypothetical number--what workers would have earned, but for their injuries. To estimate the latter, we obtained actual EDD wages for a matched control group, i.e., uninjured workers who were working in the same firm at the same time and for similar wages as the PPD claimants to whom they were matched.

By comparing wages of injured and control workers before the injury date, we were able to support the reasonableness of using the controls' post-injury wages as an estimate of what injured workers would have earned, but for their injuries. Average wages for PPD claimants and control workers were virtually identical as far back as our data went, up to five years before the injury.

Injured workers' wage losses can occur in two different ways. First, the injury may remove a worker from the labor market (either temporarily or permanently) so that the worker has no earnings. Second, when working, the worker may earn less than he/she otherwise would have. The wage loss comparisons showed that injured workers suffered both types of losses and that, in combination, the loss was profound.

Workplace injuries are followed by long and often recurrent reductions in time at work; these absences cause significant wage losses.

Figure 1 shows the ratio of the number of injured workers at work to the number of control workers at work over the period before and after the former's injury. The ratio is reported by the disability rating of the injured worker. Beginning with the quarter in which the injury occurs, injured workers experience significant reductions in time at work, and the reductions increase with the disability rating. Even four and five years after the injury, injured workers continue to experience more time out of work than their controls. The difference at five years ranges from 10 percent fewer working among the lowest disability rating to more than 50 percent fewer working at the highest rating.

Figure 1--Ratio of Number of Workers Injured Between 1991 and 1993
Working in Quarter to Number of Matched Controls Working,
by Disability Rating

When PPD claimants return to work after their injuries, they receive substantially lower wages. Figure 2 shows before-tax quarterly wages among the PPD claimants compared to wages for controls who are working. The gap between the two sets of wages represents PPD claimants' wage losses as measured by the difference between the groups' quarterly income from wages while both worked. This pattern of reduced income from wages for injured workers continues throughout the four to five years of data covered by our analyses.

Figure 2--Mean Quarterly Wages and Benefits for Injured Workers Injured Between 1991 and 1993 and Controls, Including Only
Quarters When Both Are Working

Figure 3 compares average quarterly before-tax earnings of the injured workers and controls, including zero income for either controls or injured workers not at work. Together the shaded areas represent the full measure of earnings loss from both reduced wages and increased time out of work.

Figure 3--Mean Quarterly Wages and Benefits for Injured Workers Injured Between 1991 and 1993 and Controls, Including
Injury-Related Time Out of Work

The joint effect of both losses is profound: Injured workers spend less time at work and, when working, earn less than their controls. For example, PPD claimants injured in 1991 and 1992 received approximately 40 percent less earnings than their controls over the four to five years after their injuries.

A primary objective of California's workers' compensation system is to ameliorate injury-related wage losses and support workers for some period of time until they can adjust to their changed financial circumstances. The system provides temporary disability benefits during the initial period after an injury, maintenance for workers in vocational rehabilitation programs, and permanent partial disability benefits after workers return to work or when their medical conditions stabilize. The goal of temporary benefits is to replace two-thirds of the pre-injury wage. The goal of permanent benefits is to compensate for lost ability to compete. We measure this lost ability as wages lost and assume that the goal for permanent partial disability compensation is comparable to the goal for temporary benefits: the replacement of two-thirds of wages lost.

Figures 2 and 3 illustrate how much of the wage loss (i.e., the gap between PPD claimants' wages and controls' wages) is reduced by workers' compensation benefits and how much remains uncompensated. The benefits counted include temporary disability, permanent partial disability, and vocational rehabilitation maintenance allowance. For represented claimants, benefits also include the fees paid to lawyers. During the first five years the benefits failed to meet the objective of compensating injured workers for two-thirds of wage loss. Benefits totaled slightly less than 40 percent of workers' full losses--losses both from being out of work and from their reduced wages during employment (Figure 3). Even using the conservative estimate of wage loss shown on Figure 2 (wages lost during the initial period of employment after injury and then differences in wages between PPD claimants and controls when both were working), benefits compensated slightly less than half of wage loss.

We simulated three adjustments to our analyses to investigate the sensitivity of our results to various limitations of our data.

We examined how taxes affect wage replacement. Benefits are tax free and therefore more valuable than the taxable wages lost to injured workers. When the tax status of benefits is considered, after-tax wage replacement rates are significantly higher than before-tax rates, approaching two-thirds for our conservative measure based on income while working, but still below 50 percent for full losses including time out of work.
We observed continuing wage loss in the last year of our data, but few of the claimants were still eligible to receive benefits. We simulated the effect of continued wage loss for 10 years after the injury; the simulation lowered wage replacement rates by more than the tax adjustment raised them.
We investigated how the benefit schedule adopted in the 1993 reforms would have affected benefits for our sample of workers injured in 1991-1993. The percentage of wage loss replaced by workers' compensation benefits would have increased from 48 to 53 percent, based on the conservative income while working, and from 38 to 42 percent, based on full lost wages. Measured against the two-thirds replacement criterion, the rates are still inadequate.

Injured workers may also receive compensation from other programs over the four to five years after the injury, such as Social Security Disability Insurance or Unemployment Insurance. The estimated replacement rates, therefore, do not necessarily reflect the replacement of income by all social insurance programs, only workers' compensation. To fully assess the financial consequences of a workplace injury, future research must also consider the availability of other income support programs.

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