The economics and politics of workers' compensation, 1930-2000

Abstract

Workers' compensation insurance in the United States began in the early twentieth century when states rapidly enacted their own versions to protect workers and limit the liability of employers. Premiums account for two percent of payrolls, and substantially more in dangerous industries, and therefore represent an important portion of the modern employment compensation package. The introductory section provides an overview of worker's compensation insurance. The second chapter outlines the crucial issues relevant to workers' compensation programs between 1930 and 2000. It also explains how the program has evolved over the past seventy years. The third chapter delves into the political economy of workers' compensation benefits. States passed workers' compensation laws in the early twentieth century and continue to frequently update important aspects of these statutes. The trend has been for state legislatures to mandate more generous benefits; however, these changes seldom occur simultaneously in all states. A panel dataset is used to explain why states mandate unequal benefits. These benefits differ in several ways, including wage replacement rates, maximum weekly benefits, and the duration of payments. To take into account the important variation, state-level information is used to construct an index that describes the expected net present value of benefits an average worker might expect to receive in each state for each year. The results suggest that federal and state governments, employment characteristics, and unionization each influence overall benefits. Then, the interaction between the wages that workers earn and their state-mandated workers' compensation benefits is explored. Economic theory implies that, all else equal, higher expected benefits will be offset by lower wages. A new strategy is developed to reduce the biases inherent in the earlier estimation techniques. I apply a two-step procedure that divides the sample and uses separate measures of benefits to understand the impact on workers' wages. The results suggest that wage offsets are largely avoided by high-wage workers and offsets for workers in hazardous occupations vary over time.