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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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    References listed on IDEAS

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    Cited by:

    1. East, Chloe N. & Kuka, Elira, 2015. "Reexamining the consumption smoothing benefits of Unemployment Insurance," Journal of Public Economics, Elsevier, vol. 132(C), pages 32-50.
    2. Campos, Rodolfo G. & Reggio, Iliana, 2016. "Optimal unemployment insurance: Consumption versus expenditure," Labour Economics, Elsevier, vol. 38(C), pages 81-89.
    3. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
    4. repec:hrv:faseco:34330197 is not listed on IDEAS

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