Economic Analysis in Employment Case, Part 2

Business_Finance_57127HISTORIC LOSS (Back pay) – This period is from time of incident to date of trial. Wage growth rates could be used but no discounting.

Adjustment for promotions, “lost-chance” damages:  Back pay may be increased to take into account promotions the employee was likely to have received.

PRESENT VALUE (PV) OF FUTURE LOSS (Front pay) – i.e. the lump sum payment today that is equal to a stream of future compensation—assumes lump sum is used to purchase financial instruments that will generate returns in an amount approximately equivalent to the total future compensation.

Lifetime front pay upheld under FEHA:  An award of front pay that compensated plaintiff for the remainder of her entire working life has been upheld under California’s FEHA.

Discounting to present value:  As with future medicals and all other lump-sum future damages awards, amounts recoverable for prospective earnings losses must be “discounted” (reduced) to present cash value for the probable period of disability. Broadly, “present cash value” is the amount of money which, together with investment return at the highest yield rate consistent with reasonable security, would defray the economic losses plaintiff is expected to sustain in the future.

The rationale is the law assumes that a lump-sum damage award may be invested by plaintiff so as to eventually yield an amount equal to plaintiff’s gross losses. Theoretically, at least, were the lump-sum award not discounted to present value, plaintiff would ultimately recover excessive compensatory damages (the gross amount plus the investment return on that amount).

PV = the Summation of compensation (annual) x (1 + g)^n /  (1 + d)^n

Where g is the annual growth rate of compensation, d is the discount rate, and n is the number of years of future loss.

As an example, assume n = 3, the annual compensation is $10,000, g = 3.65%, and d = 5%

Note on terminology: the net discount rate is given by d-g. In this example it is 1.35%)

Continuing, we then have:

$10,000 (1.0365)^1/(1.05)^1 + $10,000 (1.0365)^2/(1.05)^2 + $10,000 (1.0365)^3/(1.05)^3  =  $29,208

So given this example, $29,208 is the present value of this future loss.

About George Jouganatos, Ph.D.

Professor of economics for over 18 years, taught economics, finance, and quantitative analysis at UC Davis and Santa Cruz, California State University, Sacramento, and University of San Francisco. Has written many economic impact, efficiency, cost, and feasibility studies; designed economic models, strategic plans, and performance measures. Has written and conducted seminars in the field of economics of development, political economy, economic history, environmental economics, public policy, operational analysis, and economic modeling and forecasting. Over 25 years of consulting services providing economic and statistical analysis for the private and public sectors. Specialties include, but not limited to, personal injury, wrongful death, wrongful termination, housing discrimination, employment discrimination, economic loss, business valuations, lost profits, divorce, general economic and public finance issues. Consultation and testimony for numerous attorneys in California, New York, Nevada, Iowa, Montana, British Columbia, Oregon, New Mexico, and Hawaii. Expert witness and article contributor for www.ForensisGroup.com

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