Workers’ compensation financial incentives

Xuguang (Steve) Guo, University of Wisconsin–Whitewater, Whitewater, U.S.A.

Abstract

Objective: The study examined how levels of statutory cash benefits affect the number of workplace injuries and the amount of actual benefit payments.

Methods: Workers’ compensation insurance provides financial incentives to all employers through industry-level experience rating and to many employers through firm-level experience rating and/or large deductible policies. The levels of cash benefits prescribed by workers’ compensation statutes were calculated for 46 U.S. jurisdictions from 1975 to 1999. The study examined the elasticities between statutory benefits and (1) actual benefits payments and (2) workplace injury rates. Higher benefits encourage workers to take more risks (the “true injury effect”), to report more injuries and to extend the duration of benefits. Higher benefits also motivate employers to improve safety, to monitor claims and to increase rehabilitation.

Results: Benefit elasticities were significantly less than 1.0. Frequency elasticities were not statistically different than 0.

Conclusion: The benefit elasticities suggest the monitoring and rehabilitation effects are stronger than the reporting and duration effects. The frequency elasticities suggest the true injury effect is offset by the safety effect and that, in the absence of the financial incentives, employers’ safety efforts may be tempered.

Authors: Xuguang (Steve) Guo and John F. Burton, Jr.

Reference: Workers’ compensation: Recent developments in moral hazard and benefit payments. Industrial and Labor Relation Review, 2010; 63(2): 340-55.

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