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Workers' compensation and consumption smoothing

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  • Bronchetti, Erin Todd

Abstract

This paper investigates the consumption-smoothing benefits of state workers' compensation (WC) programs. These programs are among the largest and most controversial forms of social insurance, with the putative purpose of supporting families affected by unexpected income shocks due to workplace injuries and illnesses. Using Health and Retirement Study (HRS) data for a sample of workers who have experienced a work-related, work-limiting disability, I find that a 10% increase in WC benefit generosity offsets the drop in household consumption upon injury by 3 to 5%. Moreover, my estimates imply that if benefits were very low, the drop in consumption upon injury would be in the range of 30%. A model adapted from the literature on optimal social insurance yields a formula for the optimal level of WC benefits, which depends on empirical estimates of the consumption-smoothing parameter. My calculations suggest that current WC benefit levels are somewhat higher than optimal.

Suggested Citation

  • Bronchetti, Erin Todd, 2012. "Workers' compensation and consumption smoothing," Journal of Public Economics, Elsevier, vol. 96(5), pages 495-508.
    • Handle: RePEc:eee:pubeco:v:96:y:2012:i:5:p:495-508
    DOI: 10.1016/j.jpubeco.2011.12.005
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    Cited by:

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    3. Rahi Abouk & Keshar M. Ghimire & Johanna Catherine Maclean & David Powell, 2023. "Pain Management and Work Capacity: Evidence From Workers’ Compensation and Marijuana Legalization," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 42(3), pages 737-770, June.
    4. Manasi Deshpande & Tal Gross & Yalun Su, 2019. "Disability and Distress: The Effect of Disability Programs on Financial Outcomes," NBER Working Papers 25642, National Bureau of Economic Research, Inc.
    5. Marika Cabral & Marcus Dillender, 2020. "The Impact of Benefit Generosity on Workers’ Compensation Claims: Evidence and Implications," NBER Working Papers 26976, National Bureau of Economic Research, Inc.
    6. Marika Cabral & Can Cui & Michael Dworsky, 2019. "The Demand for Insurance and Rationale for a Mandate: Evidence from Workers’ Compensation Insurance," NBER Working Papers 26103, National Bureau of Economic Research, Inc.
    7. Donou-Adonsou, Ficawoyi, 2022. "The effects of health conditions on financial sector development," Economic Modelling, Elsevier, vol. 114(C).
    8. Silvia Avram & Mike Brewer & Paul Fisher & Laura Fumagalli, 2022. "Household Earnings and Income Volatility in the UK, 2009–2017," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 20(2), pages 345-369, June.
    9. Campos, Rodolfo G. & Reggio, Iliana, 2016. "Optimal unemployment insurance: Consumption versus expenditure," Labour Economics, Elsevier, vol. 38(C), pages 81-89.
    10. Pattison, Nathaniel, 2020. "Consumption smoothing and debtor protections," Journal of Public Economics, Elsevier, vol. 192(C).
    11. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
    12. Manasi Deshpande & Tal Gross & Yalun Su, 2021. "Disability and Distress: The Effect of Disability Programs on Financial Outcomes," American Economic Journal: Applied Economics, American Economic Association, vol. 13(2), pages 151-178, April.
    13. Matthew Freedman & Yoonjung Kim, 2022. "Quasi‐Experimental Evidence on the Effects of Expanding Cash Welfare," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 41(3), pages 859-890, June.
    14. Frank Caliendo & Maria Casanova & Aspen Gorry & Sita Nataraj Slavov, 2023. "Retirement Timing Uncertainty: Empirical Evidence and Quantitative Evaluation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 226-266, December.

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