CHAPTER 5

Loss to Workers and Families

As a musician, life is not over just because you are getting older, and so I find retirement a very frightening and dark thought.

—Ian Anderson

In earlier chapters, we explored the sorts of wrongful economic loss that businesses may cause and we estimated economic loss or damages via a variety of business liability examples. As noted in Chapter 4, there is a great deal more that can go into determining economic damages in real cases of business liability, and this chapter explores a few more points of interest in cases where losses are suffered by workers or the families of someone who was wrongfully injured or killed.

Worklife Expectancy

Business liability includes situations where a business wrongfully causes a loss of economic opportunity to someone. Among these opportunities is the opportunity to work and earn a wage. In personal injury cases, a claim for lost wages is often made, and if the injury leads to permanent disability, then the claim may include lost future wages from work that can no longer be done. An important issue in considering such claims is worklife expectancy—the number of future years during which a person can be expected to work. The idea of worklife expectancy is different from life expectancy—the number of future years during which a person can be expected to live—and also healthy life expectancy—the number of future years during which a person can be expected to live and remain healthy.

Since the inception of the U.S. Social Security program in the 1930s, one relevant notion of worklife expectancy is the age at which a person expects to receive full benefits from Social Security. The Social Security retirement age is particularly relevant for people who cannot reasonably be expected to earn significant income beyond that age. As such, it is more applicable to workers who are relatively low skilled, whose skills are particular to a physically demanding or hazardous industry, or who are union members with special retirement plans.1 It is less applicable to workers who are relatively high skilled, whose work is not physically demanding or hazardous, or who are not union members. Also, Social Security retirement age is less relevant for workers who love their jobs and prefer the activity of working to that of leisure, as is often the case for judges.2

Even for workers who can reasonably be expected to work until Social Security retirement age and then retire, there remains the possibility that they will have some lapses in employment or that they will die before the retirement age. If so, then the expected number of years worked will be less than the number of years until retirement age. Generally, a person’s expected worklife can be modeled as the sum or probabilities P(alive + work) of being alive and working, added up over all ages or years t. To see why, we can write the number of years that a person will continue working as the sum with 1(alive t + workt) being the “indicator” variable that equals 1 if the person is alive and working in the future year t, and equals 0 otherwise. The expectation of this sum is the sum of expectations for the summed items, and each of these has expectation E[1(alivet + workt)] = P(alivet + workt), which is a probability. These probabilities are each “joint” probabilities of two events—“alive” and “working”—and can be usefully expressed in terms of the “conditional probability” P(workt / alivet) of working if alive and the marginal probability P(alivet) of being alive

(5.1)

For a person of a given age, the probability of being alive (or dead) at various future ages t is estimated by the U.S. Department of Health and Human Services, via its U.S. Life Tables, the most recent of which was for 2014 and which covers ages t up to 100. The conditional probability of working, given that a person is alive, used to be estimated by the U.S. Department of Labor based on labor market information, and they combined this with Life Table data and formula (5.1) to provide estimates of worklife expectancy. Publication of these government-based estimates of worklife lapsed by the mid-1980s, but was revived by forensic economists by the turn of the century, with some refinements.3 The worklife expectancy charts or tables in this literature report estimates of worklife expectancy for the general population and also for subpopulations, including men, women, people with at most a high school education, people with a 4-year college degree, those currently working, those currently not working, and more.

It is useful to compare worklife expectancy to life expectancy. We can write the latter in terms similar to formula (5.1), but simpler, as follows

(5.2)

Life expectancy is a bigger number than worklife expectancy because each summed term in formula (5.1) involves the multiplication of probability P(alivet) times another probability P(workt | alivet ), which is itself a number less than 1 in value, making each summed term in formula (5.1) smaller than the corresponding term in formula (5.2). But of course one must be alive to work, so the fact that life expectancy is greater than worklife expectancy is also logically necessary, but a comparison of formulas (5.1) and (5.2) can do more than state the obvious. Noting that the conditional probabilities P(workt | alivet ) are sensibly quite small at advanced ages t, the difference between life expectancy and worklife expectancy is both logically necessary and also likely to be numerically large.

One can also compare worklife expectancy to healthy life expectancy, the latter modeled as

(5.3)

Since it is normally assumed that one needs to be healthy in order to work, the conditional probabilities P(healthyt | alivet ) in formula (5.3) are each at least as big as the ones, P(workt | alivet ), in formula (5.1), but still less than the value 1. Consequently, life expectancy exceeds healthy life expectancy, which, in turn, exceeds worklife expectancy, as one would expect.

The relevance of formula (5.1) for worklife expectancy assumes that the central issue is the amount of work a person can reasonably be expected to do. However, in cases of labor earnings loss courts sometimes emphasize instead the idea of earnings capacity—the ability to do work and receive wages. For example, if a business’s pollution poisons a housewife and renders her unable to do work, the court may find the business liable even if the woman never worked nor ever would. The idea is that if the woman could have worked, but chose instead to stay at home and raise a family, then she retained the capacity to do work, this being an economic opportunity deprived of her by the business’s actions. The loss of economic opportunity is then a business liability for which economic damages may be estimated. For this, one needs an estimate of expected worklife capacity

(5.4)

which is analogous to formula (5.1) but now in terms of worklife capacity and the probability of being work-capable.4

While labor market data provide ready estimates of the conditional probability of working, given that one is alive, it does not provide estimates of the probability P(work-capablet | alivet ) of being work-capable conditional on being alive. For this reason, the worklife formula (5.4) cannot currently be estimated in a way that is directly analogous to how formula (5.1) is estimated. A simple solution is to assume that each healthy person is capable of working and receiving wages, in which case the probability P(work-capablet | alivet ) coincides with the probability P(healthyt | alivet ), and applying formulas (5.3) and (5.4) one finds that worklife capacity expectancy is the same as healthy life expectancy. Data on healthy life expectancy are available from various sources,5 and a key remaining issue for estimating worklife capacity expectancy in these terms is what sort of “healthy” life state or condition corresponds best to a person having the capacity and opportunity to work.

Suppose that a satisfactory estimate of worklife capacity, or worklife expectation, is in hand. In a lawsuit alleging a loss of work capacity, it remains to estimate the expected amount of wages or earnings in those years during which the person is capable of working. In the case of a woman (or man) who is a homemaker and has never worked, a history of wages is not available for making estimates of future wages, and instead a statistical estimate of earnings capacity may be used—averaging the earnings of persons of similar background.6

In cases of wrongful death, the spouse of the deceased may sue and ask for economic damages that include both their partner’s expected future labor earnings and pension and other benefits that would be expected to continue after retirement and through life expectancy. In such cases, some economic losses continue through life expectancy, while others continue through worklife expectancy or worklife capacity expectancy. Evidence on the particulars of postretirement benefits is often available from a pension actuary or any other benefit plan representative.

For a business faced with a wrongful death suit, economic damages may be made substantially larger by the loss of postretirement benefits, relative to what they would be if the only loss were labor earnings, but only to the extent that such benefits were reduced by the (wrongful) death.

Household Services

Despite modern conveniences, at home people tend to spend a significant amount of time performing household services for themselves and their families. Such services include regular house and yard work plus shopping, managing bills and bank accounts, and caring for pets. Also included as household services are time spent planning or arranging for home maintenance and time spent traveling to stores. If a business causes a person physical injury that prevents them from providing household services for themselves and the family, the loss of such services may add to the overall economic loss and damages for which the business is liable. Also, if a business causes a person’s death, then that person’s family can seek damages based in part on the loss of household services that would have been provided if the person were still alive.

Records of employment and wages are typically available via pay stubs, other employer records, tax records from IRS and state tax offices, Social Security earnings records, and bank statements. However, records of housework—or household services generally—are less common: people do not usually record such work systematically. If the harmed person is alive, one way to gather information about their household services performed is to hire an economist or any other expert to administer a detailed questionnaire covering their day-to-day activities, similar to how the U.S. government currently goes about gathering information for its American Time Use Survey (ATUS). If the person has a spouse, they can be questioned similarly.7 In addition, the ATUS data provide useful statistics on the average amount of time spent by people on various household services. Given some estimated number of hours spent on various household services, the dollar value of those services can be estimated by applying hourly wage rates for the various service categories, with wage data available from the Bureau of Labor Statistics.8

For a business facing liability for personal injury or wrongful death, the loss of household services may be a relatively small component of economic damages, relative to labor wages. On the other hand, for a person injured near retirement age, the household services component of damages may outweigh labor wages. As with wages, an important issue with household services is the stretch of future time over which the activity is expected to take place. Clearly, for household services the time span is not greater than the person’s life expectancy but likely exceeds a person’s worklife expectancy, and perhaps coincides with healthy life expectancy.

From an economic damages perspective, an interesting question is whether an injured person (or their family) can be properly compensated for the loss of past household services. For example, if a car wreck rendered a person unable to mow their lawn last year, then they may have lost a year’s worth of lawn mowings before a personal injury trial takes place. If a court awards economic damages for the lawn mowings, it cannot go back in time and get the lawn mowed in a past season, and hence cannot replace the services themselves. It can get bills paid for any hired lawn mowing service that took over lawn mowing. It can get fines paid if the lawn went unmowed and location officials administered fines. If a spouse or other family member mowed the lawn, then the injured person did not suffer economic loss, but this circumstance may fall under the heading of collateral source—as discussed earlier—in which case family contributions may be either excluded from consideration or counted as equivalent to the situation where an outside lawn mowing service did the work.

Personal Consumption

For a wrongful death claim, brought by the deceased’s family, economic damages can include lost wages and household services. The family is suing for that part of the deceased’s wages and household services that would have gone to the family if not for the wrongful death. Each person normally requires a certain amount of money to be spent on their own maintenance or individual-specific needs, such as their own doctor visits, personal grooming, clothing, and so on. Likewise, among the household services that a person performs, some are likely to be used up by that person only, such as preparing themselves a sack lunch to take to work. For this reason, in wrongful death cases it is appropriate to subtract from earnings and household services some amount of personal consumption—the amount of goods consumed by an individual that are not jointly consumed by others.

Like data on household services, individual-specific information on a person’s personal consumption is unlikely to be as well-documented as is a person’s labor market activity. In addition, in a wrongful death case one does not have the opportunity to question the (deceased) person about their consumption patterns, though one may be able to question family members. As with household services there are statistical averages available, based on survey data, for rates of personal consumption expenditures.9

As an intermediate step in determining economic damages in wrongful death cases, courts typically insist on the subtraction of a portion of claimed earnings loss, typically of the order of 15 to 30 percent. So personal consumption is a big deal, in terms of damages that may ultimately be attached to business liability.

Life Care Plan

In addition to earnings loss, a person who gets physically injured may face a permanent state of injury or disability in the future.

Example 5.1 Baker Biker

A baker who commutes to work via motorcycle and gets hit by a furniture delivery truck on the way to work may lose a leg. If the furniture company or its delivery driver negligently caused the baker to lose a leg, then economic damages may include the baker’s medical bills during the accident and recovery periods, and the baker’s lost wages while recovering. A baker with one leg may be able to use a prosthetic leg and still do work as a baker, but that presents two problems. First, the baker’s productivity at work may be less due to slowness associated with a prosthetic leg and permanent disability. Second, a prosthetic leg can be very expensive and is often custom-made.

For a long-term physical disability, such as a lost leg, the effects of the disability on work productivity may be possible to measure or estimate, and if so then the effect on future wages may also be possible to estimate, and so fall into the economic damages framework we have discussed so far. But what about the medical and health care costs associated with the disability? Determining the reasonable set of ongoing medical services and goods needed to accommodate a lost leg or any other disability likely requires the expertise of a doctor or nurse. Assuming that the medical goods and services can be identified, they can be scheduled into a life care plan—a scheduled set of medical and health-related services and goods, designed to restore the injured person to a state of health and function as good as the person had before the injury, or as near as possible to that state.

To illustrate, for the baker-biker example a life care plan may include the initial purchase of a regular-function prosthetic leg, plus the purchase of a special-function prosthetic leg—for more strenuous or exercise-oriented activities. In addition to the “legs” themselves, a separate attachment piece—for connecting the “leg” to the human leg stump, may be needed. The equipment undergoes wear and tear with use and so may require annual maintenance as well as replacement of the equipment every 3 to 5 years. Also, the injured person will likely require rehabilitation in the prosthetic leg’s use and this training may need to be continued if the design of future prosthetic legs changes. If the baker biker lost his leg in his 20s, a life care plan may cover 50 more future years of medical and health-related goods and services.

For a business that negligently causes personal physical injury, economic damages associated with a life care plan may run into the millions of dollars. The economic loss associated with a life care plan can be put into the analytical framework discussed earlier in this book, as long as the cost of the medical or health equipment and services can be priced—creating a schedule or stream of current and future costs.10 Once the life care plan is converted into a stream of costs, it can be brought to the present value using the economic models presented in Chapter 3. The present value, in dollar terms, is part of economic damages.

In applying economic models to life care plans, two issues arise. One is the choice of discount rate, when bringing future costs to the present value. Commonly, a risk-free or low-risk discount rate—such as the yield on a government bond—is used for this purpose, just as when bringing lost labor earnings to the present value. Another issue is that the price of medical and health-related goods and services changes over time, sometimes dramatically. A doctor or nurse typically specifies a life care plan with its goods or services components at their current market cost, but that same doctor or nurse may not be qualified to opine on how the components’ prices are likely to change in the future. Instead, an economist may be asked to fill this role—using relevant market data, published forecasts of medical prices, and possibly some economic model of the health care industry.

For an economist trying to forecast medical cost inflation, when estimating economic loss associated with a life care plan, conditions in the private market for health care and medical goods and services are relevant. Also relevant are public or government effects on prices and costs. The U.S. federal government exerts an important influence on the health care and medical prices, via the Medicare program, and the government itself provides useful forecasts of future costs associated with this program. Also, government-mandated changes in the health insurance market, including the Affordable Care Act (ObamaCare), have also impacted health and medical costs.11 For some goods, like prosthetic limbs, the technology may be advanced and its pricing may require additional data and modeling assumptions. Generally, prices of health- and medical-related goods and services have risen over time, at a rate that has matched or exceeded the general rise of consumer prices, and a conservative approach to forecasting health or medical inflation is to use inflation in the broad-based consumer price index.12

1Another possible reference point for retirement age is the age at which a person qualifies for Medicare, which is normally 65 years.

2For relevant discussion, see the article “Worklife and Economic Damages” (in The Brief, a periodical published by the American Bar Association, 2014) by the author Scott Gilbert.

3See, for example, the article “The Markov Process Model of Labor Force Activity: Extended Tables of Central Tendency, Shape, Percentile Points, and Bootstrap Standard Errors.” Journal of Forensic Economics 22, no. 2, 2011, by Gary Skoog, James Ciecka, and Kurt Krueger.

4In formula (5.2), “worklife_capacity” means worklife capacity and worklife_capable means worklife-capable.

5See, for example, “Healthy Life Expectancy: Mortality and Morbidity Analysis, 2010 Tables” (Expectancy Data, 2014).

6For more discussion of the valuation of earnings capacity, see the article “The Valuation of Earnings Capacity: Definition, Measurement, and Evidence.” Journal of Forensic Economics 12, no. 1, 1999, by Stephen Horner and Frank Slesnick.

7As the injured person and their spouse stand to benefit from economic damages, their responses to questionnaires must be interpreted accordingly.

8See, for example, “The Dollar Value of a Day: Time Diary Analysis, 2013 Dollar Valuation” (Expectancy Data, 2014).

9See, for example, the articles: “Patton-Nelson Personal Consumption Tables 2005–06.” Journal of Forensic Economics 3, no. 20, 2007, by Michael Ruble, Robert Patton, and David Nelson and “Personal Consumption by Husbands and Wives.” Journal of Forensic Economics 1, no. 20, 2007, by Kurt Krueger.

10For health care costs taking place in the past—before trial—the total cost is typically determined by adding up all relevant receipts for care. Such costs are often included under the heading of “special damages,” a term that has varied meanings but in tort law refers to relatively concrete, tangible, or readily monetized losses.

11See, for example, “The Affordable Care Act and Trends in Health Care Spending,” an article posted online by the White House in 2013.

12For more on the economics of life care plans, see, for example, “Method for Calculating Reasonable Aggregate Range Estimates in Life Care Plan Analysis and Other Forensic Economic Applications.” Journal of Forensic Economics 17, no. 1, 2004, by David Schap.