Work-Related Injuries and Incentives, Adequacy, and Optimality in Workers' Compensation

The three empirical analyses in this dissertation study the e§ects of workersícompensation
beneÖts on individual behavior and household consumption as well as the impacts
of workplace injuries and illnesses on economic outcomes for a§ected workers.
In Chapter 2, I study incentive e§ects of state workersícompensation programs, exploiting
substantial cross-state variation in the generosity of workersícompensation bene-
Öts to estimate the relationship between beneÖt levels and the frequency of claims. Using
a large data set of 25 matched March Current Population Surveys (CPS), my estimates of
the reduced-form relationship between claims and beneÖts are appreciably smaller than
those obtained by existing studies using similar methods. In addition, I Önd that controlling
carefully for the ináuence of wages on claim propensities causes the estimated beneÖt
elasticity to shrink dramatically, so that a 10 percent increase in beneÖts is associated
with less than a 1 percent increase in claims.
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Chapter 3 evaluates the extent of consumption-smoothing provided by workersícompensation
beneÖts when a worker is injured at work. I Önd a signiÖcant consumptionsmoothing
e§ect of workersícompensation: A 10 percent increase in beneÖt levels is found
to o§set the drop in household consumption upon injury by 2.5 to 4 percent. I also present
a model that provides an explicit formula for optimal beneÖts. My calculations indicate
that current beneÖt levels are higher than optimal: That is, the consumption-smoothing
beneÖts of workersícompensation beneÖts are modestly outweighed by their distortionary
e§ects on labor supply.
Finally, Chapter 4 explores the impacts of work-related injuries and illnesses on labor
market outcomes for older workers nearing retirement. I Önd that a workplace injury is
associated with signiÖcant and persistent declines in earnings and labor supply for these
workers. Incurring a work-related injury is found to substantially increase the probability
of labor force exit and retirement in the year of injury onset. Results from Öxed-e§ects
regressions also indicate both short- and long-term declines in annual hours worked and
earnings for workers with late-career injuries. Finally, I document evidence that the
negative impacts of workplace injuries are larger, the more severely the injury impairs
daily functioning.