Economic Analysis in Employment Cases, Part 4

Growth Rate (of salary)

The higher the growth rate, the higher the Present Value of future earnings.

I typically use a historic twenty-year national average growth of some type of wage (e.g. private sector nonagricultural wage) published by BLS.

Why not use past average wage growth rate of plaintiff?

Info may not be fully available.

The future is uncertain.

Retraining to another occupation.

Often the historic national average may be less than plaintiff’s past wage increases. So, I duly note in my Report or in testimony, that a more conservative number is being used.

Why not use the inflation rate, as given by the Consumer Price Index?

The unfortunate reality is that for the average American wage growth has not been keeping up with inflation since approx 1975! This may be referred to as the phenomenon of the falling real wage.

Using the inflation rate, therefore, may overstate the loss.

Using this wage growth rate is more conservative (and more accurate/more astute) and should be duly noted in the Report and in testimony.

Effect of inflation:  In arriving at a realistic gross award, the trier of fact is allowed to consider inflationary factors–i.e., that the purchasing power of the dollar is decreasing and that wages are increasing with the cost of living. The inflationary index factor,

however, must be based on “sound and substantial economic evidence.” Again, this generally requires the testimony of expert economists. [Rodriguez v. McDonnell Douglas Corp. (1978) 87 Cal.App.3d 626, 151 Cal.Rptr. 399]

Growth Rate of Future Medical Costs (if any)

Typically, the medical expert will provide economist with current costs of medical needs.

If medical care is less extensive, then the economist may be able to extract from the physician the current costs of treatment and medicine.

In any event, the economist must perform a present value computation. The discount rate will remain the same as it was for the analysis involving the future loss of compensation.

The growth rate utilized, however, for these medical costs involving procedures, medical appointments and medicines should be the medical component of the inflation rate, not the inflation rate itself. Using the latter will understate the future costs.

Salary Base

In the peer-reviewed Journal of Forensic Economics 12(1), 1999, pp. 13-32, the authors of an article entitled “The Valuation of Earning Capacity Definition, Measurement and Evidence,” state:

For the average injured worker, past history remains the most important source of factual information for pre-injury earning capacity…This earnings data is likely to have an impact on the eventual compensation award. This is true because past behavior is, after all, strong evidence of what a person was capable of doing in the past, and absent identifiable changes, strong evidence of what they would be capable of doing in the future. Actual earnings data is often the starting point for measuring capacity.  If there is no information to the contrary, it is usually assumed that actual earnings demonstrate earning capacity (emphasis added).

This notion is bolstered by yet another peer-reviewed publication, Litigation Economics Digest. In an article entitled “Principles of Establishing the Lost Earnings Base,” in Litigation Economics Digest 1(1), 1995, pp.45-61, the authors conclude, at page 59 “In choosing a lost earnings base, forensic economists look to the specific earnings history of the individual, when available, and exercise judgment in determining the earning capacity that should be expected in future years.

The analysis set forth in the two journal articles demonstrates the typical process for determinations of lost future earning capacity, which necessarily considers past earnings. The subject documents are plainly necessary for this purpose, and the experts should be permitted to rely upon such data, and opine accordingly.

Salary and generally compensation differentials are used as annual compensation basis in the computations for employment matters.

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

No comments yet... Be the first to leave a reply!