Earnings Losses and Benefit Adequacy in California's Workers' Compensation System

Estimates for 2005–2017 Injury Dates

by Michael Dworsky, Stephanie Rennane, Nicholas Broten

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Research Questions

  1. How did earnings losses experienced by injured workers evolve over time for workers injured between 2005 and 2017?
  2. What explains earnings loss trends and the slow recovery after the Great Recession?
  3. What factors drive the regional differences in earnings losses after cumulative trauma injuries?
  4. How do benefits paid to injured workers compare with earnings losses, and how has the adequacy of benefits changed over time for workers injured between 2005 and 2017?

Workers' compensation systems are designed to provide medical care and indemnity (or wage loss) benefits and to protect workers against medical expenses and income loss that result from workplace injury. Although most workers' compensation claims are for minor injuries that require only medical care, many workplace injuries result in temporary or permanent work disability and earnings losses that can be substantial. Patterns of earnings loss can identify which workers need more attention from policymakers. Earnings loss data are also needed to evaluate benefit adequacy or return-to-work interventions. But post-injury labor market outcomes are not regularly reported in the state of California, impeding monitoring, research, and evaluation.

This final report in a series is part of a regular effort to monitor the wage losses of injured workers in the California workers' compensation system between 2013 and 2017. It updates estimates of trends in earnings losses reported in this project's three interim reports and includes analysis of the factors that have driven changes in workers' labor market outcomes from 2005 to 2017. It also provides an investigation of the reasons for regional differences (between Southern California and the rest of the state) in labor market outcomes for workers with cumulative trauma injuries. The report also provides estimates of after-tax wage replacement rates for workers with permanent disability and the first estimates of wage replacement rates in California for workers affected by statutory increases in permanent disability benefits that were adopted as part of major workers' compensation reform legislation enacted in 2012.

Key Findings

Earnings Are Recovering After Dropping During the Great Recession, But Slowly

  • Earnings in the second year after injury averaged 85 percent of potential earnings for workers injured before (2005–2007) the Great Recession, dropped to 79 percent during the Great Recession (2008–2009), then rebounded to 81–83 percent of potential earnings after 2013.

Several Factors Drove Trends in Earnings Losses Between 2005 and 2017

  • The authors examined changes in worker demographics, injury mix, employer characteristics, and local labor market conditions.
  • These factors explained only some of the decline in post-injury earnings. Other factors—including statewide labor market conditions and secular changes in the labor market—are likely to explain more of the change in earnings over time.

Benefit Adequacy for Workers with Permanent Disability Has Not Improved as Much as Expected

  • After-tax earnings losses over five years post-injury grew sharply during the Great Recession, from about $43,000 for workers injured in 2005–2007 to about $52,000 for workers injured in 2008–2010.
  • Despite economic recovery, earnings losses averaged $57,000 for workers with permanent disability who were injured in 2014.
  • Paid indemnity benefits and settlements for workers with permanent disability rose after increases in benefits were implemented in 2013 and 2014, but the increase in paid benefits was not large enough to offset the increase in earnings losses.
  • After-tax wage replacement rates declined for workers with permanent disability, from 67 percent for workers injured in 2005–2007 to 57 percent for workers injured in 2014.

Recommendations

  • Explore policy interventions to improve return to work and reduce post-injury earnings losses
  • Consider whether payment of benefits to workers from special funds (such as the Subsequent Injuries Benefits Trust Fund and the Return-to-Work Supplement Program) poses administrative barriers to workers who need to access these funds
  • Make changes to databases on workers' compensation system to make it easier to combine claims data with other important information about claim processes (e.g., adjudication, permanent disability ratings, or payments from special funds) and economic outcomes (i.e., post-injury earnings)

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Data and Methods

  • Chapter Three

    Updated Estimates of Earnings Loss Trends

  • Chapter Four

    Explanations for Earnings Loss Trends and the Slow Recovery After the Great Recession

  • Chapter Five

    Regional Differences in Earnings Losses After Cumulative Trauma Injury

  • Chapter Six

    Earnings Losses and Benefit Adequacy for Injured Workers

  • Chapter Seven

    Conclusion

  • Appendix

    Methods and Supplementary Results

Research conducted by

This research was sponsored by the California Department of Industrial Relations and conducted by the RAND Institute for Civil Justice, part of the Justice Policy Program within RAND Social and Economic Well-Being.

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