Revisiting Incentive Effects in Workers' Compensation: Do Higher Benefits Really Induce More Claims?

Abstract

An important question to ask regarding social insurance programs such as workers' compensation (WC) is to what extent do higher benefits lead to more claims? The authors of this study revisit incentive effects of WC, using 25 years of data (1977–2004) from the March Current Population Survey (CPS) to estimate the relationship between WC cash benefit levels and the frequency of WC receipt. Providing new evidence on the subject, they demonstrate that conclusions regarding workers' incentives to claim benefits differ dramatically depending upon how one controls for the confounding influence of an individual's past earnings. The authors' expanded empirical specifications, which include flexible earnings controls, yield benefit-participation elasticities smaller than 0.1. Their findings suggest that WC claims are not particularly responsive to changes in benefit levels and that labor supply disincentives may warrant less concern than economists or policymakers have typically exhibited. The authors also find that WC receipt was less responsive to benefit variation after 1990 than in previous years.