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Loss of Earnings: When Do The Damages Stop?

January 5, 2017
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In addition to past and present losses, experts are often engaged to estimate future damages for individuals who may continue to sustain a loss of earnings for considerable periods of time (if not permanently) after an injury or wrongful act.
 
Lost earnings can be defined as the difference between what the claimant would have earned had there been no injury and the claimant’s actual earnings, if any, over the same period. One of the first questions then becomes how long would these “but-for” earnings have continued into the future?
 
In other words, when do the damages stop?
 
Even without the effect of the offending act being litigated, there is no guarantee a claimant would remain part of the workforce consistently for the remainder of his or her life, or even for the remainder of his or her typical earning years. People are subject to circumstances beyond their control that could result in future sickness, disability, unemployment, or untimely death. Individuals also voluntarily leave the workforce to pursue higher education, raise a family, or provide long-term care for a family member, travel, retire, etc. So when measuring damages with an eye to placing the injured party back into the same economic position that he/she would have enjoyed but for the injury, the individual’s “work-life expectancy” must be considered.
 
In short, even before applying annual earning dollar amounts, an expert must estimate the claimant’s (a) remaining work life (in years) and (b) the probability that the claimant would have remained employed during each of those years.
 
There are generally three separate ways to adjust for the work-life
expectancy.
 
1) The “LPE” Method (Life, Participation, & Employment)
 
2) Use of “Markov Process” Work-Life Tables
 
3) Use of a Fixed Retirement Date
 
THE LPE METHOD
 
The LPE method adjusts for an individual’s work-life in three multiplicative reductions. Each individual’s ultimate death is a certainty. Determining when that will occur is the subject of probabilities. Therefore, the first adjustment accounts for the probability of living (“L”), meaning expected lost earnings each year are reduced for the cumulative probability that the individual will not survive to the next year. Estimates of such information is readily available in life expectancy (mortality) tables often published by
insurance companies and other statistical sources. As an individual gets older and the probability of death trends higher, the probability of actual earnings for each subsequent year trends lower.
 
Since remaining alive does not guarantee earnings, the second adjustment accounts for the probability the claimant will continue to work; i.e., workforce participation (“P”). This adjustment speaks to the likelihood that the individual will retire, become disabled, or voluntarily leave the workforce for a variety of reasons. The lost earnings each year are reduced by the probability that the individual would not participate in the workforce and therefore could not have earnings. The workforce participation rates are often obtained from tables created by the U.S. Census Bureau.
 
The third adjustment accounts for the probability of employment (“E”). This adjustment takes into account that the claimant could become unemployed as a result of layoffs or perhaps a termination at some point during their career. The lost earnings each year are reduced for the probability that the individual would be unemployed and therefore could not have earnings. The unemployment rates can be obtained from tables created by the Bureau of Labor Statistics.
 
Depending upon the law, the net lost earnings (after the L, P, and E adjustments) for each year are sometimes discounted back to present value, at an appropriate discount rate.
 
THE MARKOV PROCESS WORK-LIFE TABLES METHOD
 
The Markov Process Work-Life Tables (“Work-Life Tables”) reduce the expected time period of the earnings to account for some of the same risks as found in the LPE method. Namely the Work–Life Tables method addresses mortality and participation issues.
 
For example, the most recent Work-Life Tables compiled by Skoog, Ciecka, & Krueger and published in 2011 in the Journal of Forensic Economics vol. 22(2) indicate that a 43- year-old male with a bachelor’s degree has a median work-life of 18 years. This implies retirement at the age of 61 (43+18) at which time damage calculations end. The LPE Method, on the other hand, could theoretically be carried out until an individual is 100 (the last date of most life expectancy tables).
 
However, unlike the LPE method, the Work-Life Tables do not consider the possibility of losing one’s employment. Therefore, it may be appropriate when using the Work-Life Tables method to consider a separate adjustment to account for potential unemployment periods of the injured party. Again depending upon the law, the lost earnings for each year are often discounted back to present value at an appropriate discount rate.
 
THE FIXED RETIREMENT DATE METHOD
 
Under this method, the expert does not reduce the earnings or work-life for the previously discussed risks of death, disability, etc. Instead, the expert will continue the calculation until a fixed retirement date for that individual.
 
Ending the calculation at this point might be inappropriate, as it calculates the amount an individual could earn, rather than the amount that they are likely to earn. To adjust for this, experts will often compensate for the work-life risks by increasing the present value discount rate to a “risk adjusted rate.” However, careful consideration should be given to the underlying method used to
adjust the discount rate.
 
RECONCILING THE LPE METHOD AND THE WORK-LIFE TABLES
 
While results from the LPE method and the Work-Life Tables should approximate each other, in practice the calculations often render different results. The primary reason for this disparity is associated with the participation rate. The participation rate is determined differently under the two methods. Under the LPE method, the participation rate does not consider an individual’s current participation status. So, for example, under the LPE method, all 60-year- old males would have the same workforce participation rate regardless of whether the employee is currently working. Clearly one would expect that a working individual would more likely be working in one year’s time than an individual who is not currently working (disabled, retired, etc.).
 
The Work-Life Tables method, on the other hand, relies upon different data for active individuals (those currently participating) than inactive individuals (those currently not participating). Therefore, in many circumstances, reliance upon the Work-Life Tables might be more appropriate than the LPE method.
 
That is not to say that the LPE method is without advantages. For example, the data utilized in the LPE method is updated at least annually, whereas the most recent Work-Life Tables are based upon data from 1998 through 2004.
 
So when does the damage period end?
 
It depends on both the law and the data source that the damage expert relies upon. The expert must carefully consider the underlying facts of every case to make a meaningful and well- supported estimate of each claimant’s remaining work life. Failure to do so could result in a significant under or overestimation of damages and confusion for plaintiffs, defendants, attorneys, and judges alike.