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R

ETURN TO

W

ORK AFTER A

L

UMP

-S

UM

S

ETTLEMENT

Bogdan Savych

WC-12-21 July 2012

WORKERS COMPENSATION RESEARCH INSTITUTE

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COPYRIGHT ©2012 BY THE WORKERS COMPENSATION RESEARCH INSTITUTE

ALL RIGHTS RESERVED. NO PART OF THIS BOOK MAY BE COPIED OR

REPRODUCED IN ANY FORM OR BY ANY MEANS WITHOUT WRITTEN PERMISSION

OF THE WORKERS COMPENSATION RESEARCH INSTITUTE.

ISBN 978-1-61471-964-9 (online)

PUBLICATIONS OF THE WORKERS COMPENSATION RESEARCH INSTITUTE DO NOT NECESSARILY REFLECT THE OPINIONS OR POLICIES

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A

CKNOWLEDGMENTS

Many people have contributed their knowledge and advice to our effort of better understanding return to work after a lump-sum settlement in Michigan. Rick Victor at WCRI provided valuable guidance. Reviewers gave us helpful comments and ideas. In particular, Henry Hyatt and Erin Todd Bronchetti, the technical reviewers, were extremely valuable. Helpful comments were also received by many other reviewers. Linda Carrubba provided very helpful administrative assistance and edited the manuscript with great skill. Any errors or omissions remaining in this report are responsibility of the author.

%RJGDQ6DY\FK Cambridge, MA July 2012

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T

ABLE OF

C

ONTENTS

List of Tables 5

List of Figures 6

Executive Summary 7

1. Introduction 10

2. Background on Settlements’ Role in Workers’ Behavior 13

Policy Background on Use of Settlements across States 13

Use of Settlements in Michigan 14

How Workers May Respond to Lump-Sum Settlements 16

3. Data and Empirical Approach 19

Data Sources and Measures 19

Characteristics of Workers with Redemptions 20

Outline of the Empirical Approach 23

4. Results 26

Change in Average Employment Rate after a Settlement 26

Employment Behaviors after a Settlement 27

employment exit among those who were working at the time of the

settlement 28 employment entry among those who were not working at the time of

the settlement 30

main contributors to employment change 32

Do Workers Behave Strategically? 34

does employment exit increase before a settlement? 34

do workers delay return to work before a settlement? 37

correlation of pre- and post-settlement employment patterns 39

Employment with At-Injury Employer 41

Role of Worker and Claim Characteristics in Employment Trends 42

employment trends by worker characteristics 42

employment trends by settlement type and amount 45

employment changes by injury type 48

5. Discussion and Policy Implications 50

Implications for Public Policy 50

Interpretative Caveats and Further Research Needs 53

Technical Appendix 55

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L

IST OF

T

ABLES

2.1 Selected Indemnity Benefits per Claim with More Than 7 Days of Lost Time in Wage-Loss States, 2007/2010 / 15

3.1 Descriptive Statistics for Workers with an Indemnity Injury with and without a Settlement / 21 4.1 Employment Patterns after the Settlement among Workers Who Were Employed at

the Time of Settlement / 29

4.2 Employment Patterns after the Settlement among Workers Who Were Employed at the Time of Settlement Based on Employment with At-Injury Employer or New Employer / 30 4.3 Employment Patterns after the Settlement among Workers Who Were Not Employed at

the Time of Settlement / 31

4.4 Comparing Employment in the Settlement Quarter and Four Quarters after the Settlement / 33 4.5 Employment Patterns in the Quarters before the Settlement for a Subsample of Workers

Who Were Not Employed at the Time of Settlement / 40

4.6 Employment Patterns in the Quarters before the Settlement for a Subsample of Workers Who Were Employed at the Time of Settlement / 40

TA.1 Regression Estimates / 56

TA.2 Predicted Employment by Subgroups of Workers in the Four Quarters after the Settlement / 59 TA.3 Employment Patterns in the Settlement Quarter and One Year after the Settlement Quarter / 61 TA.4 Characteristics of Workers Based on Employment Status in the Settlement Quarter / 64 TA.5 Characteristics of Workers Who Were Employed in the Settlement Quarter Based on Their

Employment Status One Year after the Settlement / 66

TA.6 Characteristics of Workers Who Were Not Employed in the Settlement Quarter Based on Their Employment Status One Year after the Settlement / 68

TA.7 Characteristics of Workers Who Were Employed in the Settlement Quarter Based on Their Employment Status One Year After the Settlement with At-Injury Employer or New Employer / 70

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L

IST OF

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IGURES

4.1 Average Employment Rate before and after the Settlement with Confidence Intervals / 27 4.2 Percentage of Employed Workers Who Exited Employment before and after the Settlement / 35 4.3 Percentage of Employed Workers Who Exited Employment before and after the Settlement,

Sample of Cases with at Least 7 Quarters between the Injury and the Settlement / 36

4.4 Employment Exit from At-Injury Employer and New Employer before and after the Settlement / 37

4.5 Percentage of Non-Employed Workers Who Returned to Work before and after the Settlement / 38

4.6 Percentage of Non-Employed Workers Who Returned to Work before and after the Settlement, Sample of Cases with at Least 7 Quarters between the Injury and the Settlement / 39

4.7 Average Employment Rate and Employment with At-Injury Employer before and after the Settlement / 41

4.8 Predicted Employment by Age / 43

4.9 Predicted Employment by Gender / 44

4.10 Predicted Employment by Marital Status / 44

4.11 Predicted Employment by Subgroups of Workers with Different Settlement Amounts / 46 4.12 Predicted Employment by Claim Type / 47

4.13 Employment by Subgroups Based on Number of Years between the Time of Injury and Settlement / 48

4.14 Predicted Employment by Injury Type / 49

TA.1 Average Employment before the Settlement, by Groups of Workers Based on Number of Quarters between the Injury and the Settlement / 72

TA.2 Employment Trends across Cases with and without a Settlement / 76 TA.3 Employment Exit Rate / 76

TA.4 Employment Entry Rate / 77

TA.5 Employment Trends among Workers Who Were Employed with At-Injury Employer in Quarter 0 / 78

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E

XECUTIVE

S

UMMARY

Do lump-sum settlements of workers’ compensation benefits discourage return to work? This question is often raised in policy discussions about allowing or restricting settlements of workers’ compensation benefits. Some observers have expressed concern that receipt of a sizable lump sum will delay return to work because workers may feel less immediate need for income. Economists call this an income effect. System practices in some states may reinforce these incentives, as settlement agreements may require workers to leave their at-injury employer and seek a new job.

Other observers of the workers’ compensation system indicate that the receipt of a lump-sum settlement may encourage return to work. Settlements provide workers with the sense of closure which motivates workers to restart their careers after the workers’ compensation process is over (Hyatt, 2010). This is often referred to as the closure effect. Some workers may be willing to accept lump-sum settlements in order to move on with their lives after an injury (Torrey, 2007a).

Ultimately, it is an empirical task to determine whether these hypothesized effects are material and which of the economic behaviors may dominate. That is the goal of this study.

We examined the concerns outlined above by exploring the following research questions:

 Did workers who were employed at the time of a workers’ compensation settlement stop working shortly after the receipt of the lump sum?

 Did workers who were not employed at the time of settlement find employment shortly after receiving a settlement?

Following a sample of 2,138 workers injured in Michigan in 2004 who later received a lump-sum settlement, we found evidence consistent with both behaviors outlined above. Settlements created incentives to end employment (among workers who were employed) and incentives to re-enter employment (among those who were not employed). In particular,

 30 percent of workers who were employed at the time of settlement exited employment and were no longer employed one year later. The majority of these workers (53 percent) left employment in the first quarter after the settlement.

 Employment exit behavior is more pronounced among workers who were working for their at-injury employer at the time of the settlement. About 41 percent of workers who were working for their at-injury employer at the time of the settlement left employment, while only 25 percent of workers who had found a new employer by the time of the settlement left employment one year later.

 19 percent of workers who were not employed at the time of the settlement returned to work and were employed within a year after the settlement.

These estimates of employment exit and entry behavior presented above suggest that a material fraction of workers change their employment after a settlement in Michigan. Furthermore, these findings suggest that system practices play an important role in shaping return-to-work outcomes. A commonly used practice of terminating employment with the at-injury employer as part of the settlement agreement directly contributes to some of the employment exits at the time of the settlement.

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While the results above suggest that employment exit and re-entry behaviors are important, they are not sufficient to determine which of the behavioral responses dominates. This question is important for addressing concerns of policymakers about how these behaviors contribute to changes in average employment after a settlement. The changes in the average employment rate in our sample depended on the overall number of workers who either exited employment or returned to work after a settlement. Analysis for the full sample of workers suggests the following:

 Workers who were employed at the time of the settlement but exited employment shortly after the settlement represent about 7 percent of all workers who received a settlement payment.

 An even higher percentage of workers decided to enter employment. About 15 percent of the overall sample of workers were not employed in the settlement quarter and were employed a year after the settlement.

 These two patterns of responses contributed to a 7 percentage point increase in average employment after a lump-sum settlement. While 25 percent of workers in our sample were employed at the time of the lump sum, 32 percent of workers were employed one year after a settlement. This evidence in Michigan reveals the greater importance of the closure effect that workers may experience—closing out a claim helps workers restart their careers which may have been stopped due to a disabling injury. An even more important finding is that many workers do not change their employment behavior after a settlement. The majority of workers in our sample did not work before a settlement and did not return to work within one year after a settlement. This finding may not be surprising since workers who received settlements in Michigan had suffered severe injuries.

Another behavior that we examined in this report is whether workers may have delayed their return to work in anticipation of the settlement. If many workers are able to delay their return to work, and potentially shift bargaining power to their advantage, then the settlement costs may not reflect their true disability. We examined this behavior by comparing how many workers entered employment before and after a settlement quarter. We found little evidence of this behavior in the full sample of claims that we examined—the dip in the employment re-entry rate in the settlement quarter was relatively small. At the same time, when we focused on workers with a longer duration of time between an injury and a settlement, we found a greater drop in the employment entry rate just before the settlement. Some workers in this subsample were able to delay their return to work and returned to work only after the settlement.

We also examined whether behavioral responses to the settlement varied depending upon worker and settlement characteristics. We hypothesized, for instance, that responses to settlement may vary based on workers’ age. Older workers may be on a slower recovery path than younger workers. Older workers often face greater hurdles than younger workers in finding a new job. They also are more likely to consider retirement as a viable alternative (an option that is not available to younger workers). As a result, settlements may lead to different behavioral responses based on workers’ age. Consistent with these hypotheses, we found that responses to the settlements differed by age groups. While we found an increase in employment after a settlement for workers who were less than 55 years old at the time of the settlement, we found a slight decline in employment for workers who were over 55 years old.

We found no material differences in employment trends by most other worker and claim characteristics. Employment increased after a settlement for a majority of worker and claim types. We found that employment increased for men as well as for women, for those who received smaller settlements

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as well as larger settlements, and for those with objective as well as subjective injuries. This suggests that the impact of the closure effect does not vary much depending upon the claim and worker characteristics.

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1

I

NTRODUCTION

Since one of the goals of the workers’ compensation system is to get workers back to work after an injury, policymakers are often interested in understanding how various system features may shape incentives for return to work. This study contributes to the policy knowledge by exploring how incentives to return to work change after a workers’ compensation settlement. Conceptually, several potential responses may explain changes in employment after a settlement. On the one hand, a large lump-sum payment may discourage return to work. This is consistent with the economic theory that suggests that a sudden increase in non-work income may, under some conditions, lead to lower labor force participation and discourage return to work. Workers who are working at the time of the settlement may respond to the settlement by leaving their employment. Policymakers in some states express this concern when limiting lump-sum settlements (see discussion in Reville et al. 2001, p. 7 about policy approaches in New Mexico). On the other hand, some observers expect that a settlement may improve return to work and lead to higher employment. For instance, the perception in the policy community in some states is that settlements allow some workers to resolve their issues that are being disputed and then, potentially, seek another job (Belton, 2011). In other words, the option of receiving weekly benefits may limit workers’ desire to seek new or better employment. Consistent with these explanations, we may expect that some of the workers who are not working at the time of the settlement may find new employment after the settlement. Given conflicting conceptual explanations, it is an empirical task to determine how employment changes after a settlement and which of the potential responses dominate. This report examines employment changes after a settlement in Michigan.

Existing literature provides some evidence about workers’ behavior after a settlement. Since much of this evidence as well as relevant policy concerns were reviewed in two recent studies (Hunt and Barth, 2010; Torrey, 2007b), we only briefly highlight empirical studies that focus on workers’ employment after a settlement. Morgan, Snider, and Sobol (1959) is one of the first studies that examined whether workers used lump-sum settlements for rehabilitation purposes. The authors were concerned that while lump sums provide incentives to rehabilitate, weekly benefits may offer disincentives to go back to work. Their analysis of survey responses suggested that very few workers used the settlement for rehabilitation purposes and most used them to pay off debt and meet living expenses. Evidence from a survey of workers in Maine suggests that at least some of the workers were able to return to work after a settlement, while other workers responded that their disability prevented them from working (Most and Most, 2007). They found that about half of the workers were working at the time of the settlement and about 25 percent of those who were not working returned to work after a settlement (Most and Most, 2007). A recent study of injured workers in California found that workers who received a settlement were more likely to increase employment compared with workers who received their permanent partial disability (PPD) benefits as

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periodic payments (Hyatt, 2010). The author attributed this result to a closure effect, since no increase in employment was observed among similar workers who received their PPD benefits as regular weekly payments instead of a lump-sum payment. This sense of closure was also mentioned by some of the workers in Pennsylvania interviewed by Torrey (2007a)—workers were willing to accept lump-sum settlements since they wanted to move on with their lives.

This study contributes to the literature by providing an empirical analysis of workers’ return-to-work behavior after a settlement in Michigan. In this report we highlight how different employment behaviors may contribute to the changes in the aggregate employment rate in our sample after a settlement. Consistent with the conceptual arguments outlined above, some of the workers may choose to enter employment after a settlement, while other workers may choose to leave employment. Following a sample of workers with work-related injuries who eventually received lump-sum settlements, we focused on the following research questions:

 Did workers who were employed at the time of a workers’ compensation settlement stop working shortly after the receipt of the lump sum?

 Did workers who were not employed at the time of settlement find employment shortly after receiving a settlement?

These two behavioral responses shed light on the policy implications of our analysis. If we found that many workers chose to leave employment after a settlement, then settlements are likely to provide disincentives for return to work. They may create expenses for employers and contribute to greater social costs. Some workers may underestimate their future income needs and may have to rely on public benefit systems for income support. Other workers may have greater bargaining power to extract a larger lump sum than their future income needs would require, which may create expenses for employers that are not necessarily consistent with the compensation goals of the workers’ compensation system. If few workers exit employment, then policymakers can disregard concerns that there may be significant disincentives to return to work after a settlement. Note that some workers may leave employment with the objective to retrain for a new occupation that accommodates their residual disability. Policymakers may also be concerned that some workers may choose to delay their return to work to increase the likelihood of receiving a settlement. If workers delay their return to work unnecessarily, it may increase employer costs due to larger settlements that may not reflect workers’ true disability.

We also examined whether the behavioral responses that are mentioned above vary, depending upon worker and injury characteristics. This analysis helps clarify whether limitations on the use of lump sums may be appropriate in some circumstances.

The scope of this report is limited to a descriptive analysis of the patterns of employment before and after a settlement. Data and policy restrictions limit the nature of the empirical questions that we can examine. Although we discuss multiple conceptual reasons for observed changes in employment after a settlement, we cannot attribute our results to a specific hypothesis. Furthermore, we have limited information about the reasons for changing employment before or after a settlement. We do not know why workers may choose to leave work, how they spend their settlement, and whether they continue to work in their preinjury occupations. Moreover, the nature of the available data only allows us to explore a relatively short window of employment after lump-sum settlements. Finally, we do not have much information about workers’ experiences in different parts of the economic business cycle. We observed employment only

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through the end of 2008, reflecting only early experience in the Great Recession.

The report is organized as follows. In the next chapter, we provide a background on the use of lump sums in Michigan and also set a framework for thinking about the potential effects of the settlement. Chapter 3 discusses data and empirical methods. Chapter 4 provides results. We offer concluding remarks and discuss policy implications in Chapter 5. Further discussion of the underlying methodology and alternative tests are provided in the Technical Appendix.

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2

B

ACKGROUND ON

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ETTLEMENTS

R

OLE IN

W

ORKERS

B

EHAVIOR

This chapter of the report provides background information on settlements’ role in return-to-work behavior. We start by outlining policy approaches towards lump-sum settlements across states and highlight relevant system features in Michigan. Then, we discuss multiple reasons why workers may change their employment status after a settlement.

P

OLICY

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ACKGROUND ON

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SE OF

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ETTLEMENTS ACROSS

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TATES

Approaches toward settlements differ widely across states. A recent review of state regulations revealed that forty-three states allow compromise and release agreements in some form (Torrey, 2007a,b).1 In these states, employers or carriers can rely on compromise settlements (or compromise and release agreements) to close workers’ compensation cases. In general, these settlements include an agreement between the employer and the injured worker about the amount of benefits to be paid, payment of the suggested amount in a lump sum, and a release of the employer from future liability. The specific system details, however, vary among states.

 State systems often differ based on when the settlement can occur and whether a case can be reopened after a settlement.

 States have different approaches towards allowing settlement of the future medical costs. Some states do not allow settlements for future medical costs, even though they may allow settlement of the indemnity benefits.

 Administration of the system also differs between states based on the role of the workers’ compensation agency in review and approval of a settlement, the need for a formal hearing before a settlement, and the standards used for settlement approval.

These and many other policy dimensions are discussed in detail in Torrey (2007b).

Policy approaches towards settlements are not static as state regulators periodically reevaluate the design of the workers’ compensation system. In the last few years, a number of states expanded the use of settlement agreements. In 2011, the state of Washington allowed settlements of future indemnity; however, only older workers can receive these settlements. In 2009, New Mexico expanded the number of conditions

1 Since the 2007 review, the number of states that allow settlements has increased. In 2011, the state of Washington allowed compromise and release agreements for some injured workers.

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under which the settlements were allowed. The 2007 reforms in New York required that employers offer a settlement to injured workers within six months of reaching maximum medical improvement. As summarized in Torrey (2007b) and Hunt and Barth (2010), these regulatory changes reflect the general movement toward allowing compromise and release agreements in more cases, which has been observed across many states over the last few decades.

U

SE OF

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ETTLEMENTS IN

M

ICHIGAN

Michigan is one of the states that allow settlements of future indemnity and medical payments. It is generally observed that in Michigan, settlements are most frequently used to close out payments for permanent disability claims. These agreements in Michigan are called redemptions, reflecting the fact that the executed agreement redeems the employer’s liability for further compensation for the named injury or injuries. At least six months must elapse after an injury before the settlement can be provided. Redemptions in Michigan are reviewed by a Workers’ Compensation Magistrate (administrative law judge) who must find that the agreement is voluntary, serves the purposes of the Workers’ Compensation Act, is in the best interests of the injured employee, and that the injured employee is fully aware of the consequences of the agreement (Sec. 418.836 of the Act). 2011 reforms in Michigan allowed parties to waive redemption hearings and allowed magistrates to approve redemptions without a hearing.

The nature of the settlements in Michigan reflects the wage-loss approach towards compensation for both temporarily and permanently disabling injuries. Wage-loss systems compensate earnings losses as they occur—an approach that is different from impairment or loss of wage-earning capacity systems, which attempt to determine the degree of disability and estimate future earnings losses that will result (Barth and Niss, 1999). Although a wage-loss compensation plan appears simple to manage while the losses are still occurring, this approach is more difficult to implement when it comes to predicting future benefits. Long-term earnings losses are difficult to estimate with great precision. Perhaps as a result of these features, many permanent disability claims in Michigan result in lump-sum settlements.2 Insurance companies may prefer

to settle a case to end their liability, while workers may prefer to accept a settlement that closes out their involvement with the workers’ compensation system. A review by Hunt and Barth (2010) outlines arguments under which a worker may prefer to choose a one-time settlement over a stream of periodic payments.

Multistate comparisons from the Workers Compensation Research Institute (WCRI) CompScope™ benchmarks series covering 16 large states (Savych, 2011)3 help compare and contrast use of lump sums in

Michigan and in other states. Compared with other states that do not use the wage-loss principle of compensation for permanent disability, the incidence of permanent disability benefits and/or lump-sum payments is very low in Michigan. According to the CompScope™ studies, only about 15 percent of all claims with more than seven days of lost time received such payments in Michigan, compared with a median of 45 percent in the non-wage-loss states (Table 2.1). Even among the CompScope™ sample of wage-loss systems, Michigan had a low incidence of such payments; compared with about 18 percent in Pennsylvania, 20 percent in Massachusetts, 22 percent in Louisiana, and 23 percent in Virginia (Savych,

2 In this report, we will use the two terms (lump-sum settlements and redemptions) interchangeably. 3 The study included the following states: California, Florida, Illinois, Indiana, Iowa, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, North Carolina, Pennsylvania, Texas, Virginia, and Wisconsin.

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2011, p. 86). Note that virtually all payments for permanent disability in Michigan were paid as lump-sum settlements.

Use of lump sums in Michigan may have reflected a higher underlying severity of the cases with lump sums. While fewer workers may have received lump sums in Michigan than in other wage-loss states, the settlement amount that workers received was higher. Injured workers received an average lump-sum payment of over $45,000. This measure was higher than in most other wage-loss states. This may suggest that cases with lump-sums settlements in Michigan may have included workers with more severe injuries than what we observed in other states. This observation is important for understanding how results from Michigan may apply to other states, since a different mix of injury severity may lead to different return-to-work outcomes after a settlement.

In comparison with the other wage-loss states in the CompScope™ benchmarks study (Louisiana, Massachusetts, Pennsylvania, and Virginia), Table 2.1 shows that Michigan had a lower duration of temporary disability (TD) and a moderately low average indemnity cost per claim.

Table 2.1 Selected Indemnity Benefits per Claim with More Than 7 Days of Lost Time in Wage- Loss States, 2007/2010

LA MA MI PA VA 11-State Mediana

2007/2010 claims with more than 7 days of lost time

Average indemnity benefit per claim $19,959 $15,933 $13,590 $21,879 $16,551 $13,158 Average duration of temporary disability

(weeks) 33.2 23.0 18.0 27.6 21.5 15.5

PPD/LS claims as percentage of claims

with more than 7 days of lost time 21.5% 20.0% 14.7% 18.3% 22.5% 45.2%

Average PPD/lump-sum payment per

PPD/lump-sum claim $35,362 $30,848 $45,926 $52,611 $32,487 $13,745

Claims with lump-sum settlement but no

periodic PPD payments (percentage) 17.4% 14.8% 14.0% 17.2% 15.8% 13.0%

Average lump-sum settlement per claim with lump-sum settlement but no periodic

PPD payments $38,292 $37,210 $47,011 $54,306 $39,896 $19,801

Claims with both PPD and lump-sum

payments (percentage) 0.8% 1.3% 0.2% 0.3% 1.2% 3.4%

Average PPD/lump-sum payment per

claim with PPD and lump-sum payments $83,342 $39,918 $61,534 $47,661 $42,591 $29,669 Claims with periodic PPD payments but

no lump-sum settlement (percentage) 3.4% 3.9% 0.5% 0.8% 5.5% 22.5%

Average PPD benefit per claim with periodic PPD payments but no lump-sum

settlement $9,092 $3,772 $10,199 $17,096 $9,004 $6,831

Note: 2007/2010 refers to claims arising from October 1, 2006, through September 30, 2007, evaluated as of March 31, 2010.

a States included in the 11-state median are the 11 non-wage-loss states included in CompScope™ Benchmarks, 12th

Edition. The 11-state median is the state ranked 6th on a given measure; the state changes depending on the measure being evaluated.

Key: PPD: permanent partial disability; PPD/LS: permanent partial disability or lump sum. Source: Savych (2011, p. 86)

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H

OW

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ORKERS

M

AY

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ESPOND TO

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UMP

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ETTLEMENTS

Next, we outline the main factors that may help explain why workers may change their employment status after a settlement. We draw insights from various conceptual models as well as previous empirical studies. These hypotheses will frame our presentation of the empirical results in Chapter 4.

The extent of the worker’s residual disability is perhaps the most important factor determining return to work after a settlement. Workers who are partially impaired at the time of the settlement may have limited return-to-work options after the claim is closed. Therefore, we would expect a low level of employment among workers who experience a permanent impairment as a result of an injury. This does not mean that workers with more severe remaining impairments would not be able to return to work. Some may be able to return to a part-time position or to a position that accommodates their disabilities—these workers may contribute to a potential increase in employment after a settlement. The return to work may even improve with time, if the disability eases, or if workers are able to find jobs reflecting underlying impairment.

Changes in employment after a settlement may also reflect workers taking opportunities to alter their careers. Some workers may choose to exit employment to retrain for a new job or occupation that accommodates their remaining disability. These employment exits may be desirable from the workers’ perspective if they are able to improve their longer-term employment opportunities. The settlements provide liquidity for workers to take time off from work to retrain for a new job. Although we have limited guidance from empirical studies on the role of the settlements in changing occupations (Krause, et al., 2001), this behavior can be observed if researchers observe a long window of post-settlement employment or if they have information on workers’ occupations. Without longer post-settlement data, it is not possible to know how many workers who exit employment return to work a few years after a settlement.

Economic theory may provide one potential explanation for why workers may decrease employment in response to a lump-sum settlement. An extensive economic literature was developed to better understand how income assistance from other public programs may change willingness to work, and the lessons from this literature may apply to the workers’ compensation income benefits.4 Extensive reviews of the literature

are provided in Pencavel (1986), Blundell and MaCurdy (1999), and Killingsworth and Heckman (1986). For instance, many studies examine how workers may change their labor supply behavior in response to sudden changes in income (referred to as income shocks) due to an increase in spousal earnings, or large monetary payments such as a sudden increase in income due to an inheritance, or winning a lottery. Most of these studies found that positive income shocks tend to lead to lower labor earnings, with larger effects for older workers (Imbens, Rubin, and Sacerdote, 2001). Workers who experienced an increase in non-work-related income tend to reduce their hours of work, or even exit employment. Consistent with this theory, we may expect that some of the workers who were working at the time of the settlement may have chosen to leave employment after a settlement. Workers who were not employed at the time of the settlement may have faced even lower incentives to return to employment after a settlement.

A growing literature in economics provides evidence of income effects in the social insurance programs. Analysis of the Social Security Disability Insurance (SSDI) program shows that awarding of the

4 Note that lessons from the economic studies have to take into account the change in physical disability constraints that often accompany work-related injuries. Although the injury itself is a negative income shock, mostly due to changes in the physical abilities constraints, this negative income shock is often followed by a positive income shock reflected by a settlement.

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SSDI benefits provides significant disincentives for return to work, even for people with impairments that were on the margin of allowance for SSDI benefits (Maestas, Mullen, and Strand, 2011). Substantial income effects are also found among workers who receive unemployment insurance benefits after job loss. Lump-sum severance payments as well as extension of potential duration of unemployment insurance benefits lead to lower return-to-work rates (Card, Chetty, and Weber, 2007; Chetty, 2008). Autor and Duggan (2007) demonstrated evidence of an income effect on the labor force participation rates of veterans corresponding with a change in their disability benefits. One study formally tested income effects on the labor supply of injured workers receiving workers’ compensation benefits. Hyatt (2011) found some evidence of income effects in the postinjury labor supply patterns of workers receiving temporary disability benefits in California.

Economic literature also distinguishes between income and liquidity effects. Studies on the social insurance system (Chetty, 2008) suggest that the amount of benefits that workers receive is often small relative to their life-cycle income, so it may not induce large changes in labor supply due to the pure income effect. Instead, workers’ labor supply may change due to a liquidity effect. When workers cannot borrow against their future lump-sum payments, an income transfer may be able to influence labor supply. This is a common explanation for why the labor supply of social insurance claimants reacts to severance payments (Card, Chetty, and Weber, 2007) or the amount of cash the worker has in the bank (Chetty, 2008). Applying this evidence to workers’ compensation benefits, we can observe that large lump-sum payments often reflect a large proportion of the lifetime income—a $50,000 payment may be equivalent to 5 percent of lifetime income, which may directly affect labor supply through an income effect. If this payment replaces a stream of future bi-weekly payments, workers may be more likely to respond to such a payment than the stream of regular payments.

The strength of these economic incentives depends on the settlement amount and on the extent to which workers value their current consumption versus future wellbeing. In an extreme case, workers who care mostly about their current consumption are more likely to exit employment and use the settlement to replace lost earnings.5

A common practice in Michigan is to terminate employment with the at-injury employer. As a result, we can expect that a majority of workers who are still employed with their at-injury employer at the time of the settlement will either exit employment or will look for a new job with a different employer. Note that this system practice should not have an effect on the workers who were already working for a different employer at the time of the settlement. Some of these workers might have found a job that accommodates their disabilities after an injury, while other workers might have taken a temporary position to help them out before the claim was closed. Change in employment among these workers does not reflect a response to system practices but rather reflects other factors that we mention in this section, such as economic incentives, which we discussed previously, or psychological responses to the settlements, which we discuss next.

Change in employment after a settlement may also be attributed to the psychological concept of closure

after the case is resolved. A compromise and release agreement eliminates any uncertainty about whether and how a workplace injury will be compensated. Given the stress of disputing a claim, it is not a surprise that a number of injured workers who were interviewed in Pennsylvania responded that they felt a sense of

5 Economic models of hyperbolic discounting and inconsistent time preferences may explain a decline in employment after a settlement.

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relief when the claim was closed with a settlement (Torrey, 2007b). These workers were no longer concerned about the resolution of their case, they were no longer constantly reminded about their injury, and they were glad to move on with their lives. Hyatt (2010) suggests that this closure effect may explain an observed increase in employment among workers who received their PPD benefits as a settlement in California when compared with little change in the behavior of workers who received their PPD benefits as a stream of bi-weekly payments.

Several potential mechanisms may contribute to this response to settlements. Workers who are uncertain about the ultimate amount of the settlement may choose to strategically avoid returning to work before the settlement. This incentive is strengthened by the common practice of terminating employment with the at-injury employer—workers who do not expect to return to their at-injury employer may delay their search for a new job. Some of these workers may be concerned that their employment before the settlement may be interpreted as evidence that their injury is less severe than their true level of disability. These workers could potentially have returned to work before a settlement, but they did not do so until after a settlement. After their cases are resolved, these workers may move on by returning to work.

Consistent with these conceptual mechanisms, we may expect that employment may increase after a settlement.6 Workers who were not employed after an injury may choose to enter employment. Workers

who are underemployed (or employed at less than desirable jobs) may choose to seek better employment. Responses to a lump-sum settlement may depend on worker characteristics. Workers’ age, gender, and marital status may influence whether and how workers are employed after the settlement. For instance, workers’ economic incentives to work tend to change with age—older workers may find it more difficult to shift to a new occupation, and they may also be more likely to select retirement as an option after an injury. Furthermore, the speed of recovery from an injury may also differ by age, leading to differential employment changes after a settlement based on workers’ age. Marital status may also play an important role since labor supply decisions may depend on spousal employment and earnings. Workers with lower wages might be more likely to seek and accept settlement if they are not as attached to their jobs or their future prospects at that job are less promising.

A worker’s response may also depend on other characteristics, such as injury type, the amount of the settlement, and whether the settlement reflects a disputed past temporary disability. Large settlements provide greater economic incentives when workers make their decisions. Furthermore, settlements for disputed temporary disability may lead to a different response than a lump-sum payment for permanent disability or future temporary disability. These groups of cases may have different patterns of recovery at the time of the settlement. Workers who receive settlements only for disputed temporary disability may have a greater propensity to return to work after the settlement. We explore the role of these factors in Chapter 4.

6 Economists also suggest that a substitution effect may explain an increase in employment among workers who received weekly benefits up until the receipt of a lump-sum settlement. At the moment of the settlement, the relative price of leisure for these workers increases substantially because weekly benefits are no longer being received. In this case, it would not be surprising to find an increase in labor supply for some workers, for whom the change in the relative price of leisure/work dominates the income effect of the lump-sum transfer. On average, 22 percent of workers received benefits in the quarter before a settlement, reflecting a system feature that some time often passes between employers’ termination of temporary disability benefits and receipt of the settlement. These workers may change their employment in response to both income and a substitution effects. We found an increase in the settlements in both subgroups, suggesting that the closure effect is important even in the absence of the substitution effect.

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3

D

ATA AND

E

MPIRICAL

A

PPROACH

D

ATA

S

OURCES AND

M

EASURES

This analysis examines employment outcomes for a sample of workers who were injured in Michigan in 2004 and received a lump-sum settlement some time after their injury. We identified injured workers using the Detailed Benchmark/Evaluation (DBE) database maintained by WCRI. These claim records were provided to WCRI by national and regional payors, and include claims from private insurers, state insurance funds, and self-insured employers. The database and the processes used to clean and standardize the data are reported in earlier WCRI publications.1

We received information on workers’ quarterly employment and earnings from the Michigan Unemployment Insurance Agency covering 24 quarters (6 years) from the beginning of calendar year 2003 through the end of calendar year 2008. These data were collected every quarter by the Michigan Unemployment Insurance Agency for all workers covered by the unemployment insurance program, so that if someone files for unemployment insurance benefits, the state knows what weekly benefit to pay the unemployed worker. The data cover about 97 percent of workers in the state. Almost all workers covered by unemployment insurance are also covered by workers’ compensation insurance, creating substantial overlap between the covered populations. Aside from those workers covered by federal workers’ compensation programs, virtually all workers and employers are covered by Michigan law. Only very small employers (those with less than three employees at any one time, or that do not employ one full-time worker for more than 13 weeks) are exempt. These records allow us to track employment of workers after their injury and after their lump-sum settlement. Note, however, that these employment records reflect only employment in Michigan. They do not capture potential employment if injured workers decide to move to a different state. This may suggest that the employment rate is potentially underestimated.

These records also allow us to examine employment transitions for each worker. We are able to examine whether the worker returned to the at-injury employer before or after a settlement or whether the worker was able to find a new employer. For each worker we identified the employer at the time of the injury using the employer tax identifiers and tracked changes in those employer numbers over time.2 When workers had two employers at the time of the injury, we identified their at-injury employer by finding whether other workers who were identified as injured in the DBE database working for the same employer

1 A full description of this data set can be found in Coomer et al. (2011).

2 Following previous studies, we adjusted for changes in employer numbers that are not likely to reflect a change in employer (Jacobson, Lalonde, and Sullivan, 1993; Benedetto et al., 2005). Sometimes the changes in employer numbers reflect reorganization, a merger, or change in ownership status. We identified those changes when the majority of workers stayed with the company even though the employer number changed. Those types of employment changes are not considered to be a change of employer.

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were also recorded as working for the same employer in the Michigan employment and earnings dataset. We further limited the sample by including only claims with settlements before calendar year 2008 (the last year of the earnings and employment data). This assures that we observed each worker at the time of the settlement and at least four quarters after the settlement. Although this sample restriction eliminates concerns about limited comparability of the average employment measures over time, some of the workers who may be excluded from the sample may have had severe injuries and we may not have fully observed their behavior.3 We focused our analysis on workers with a settlement, although workers without a settlement serve as a comparison group for selected examples in the Technical Appendix. For more detail about employment outcomes of workers without settlements, see Savych and Hunt (forthcoming).

The analysis sample includes 2,138 workers with a lump-sum settlement.4 The resulting dataset

includes information on workers’ earnings before and after the settlement, as well as information on the injury, the workers themselves, and their employers.5 Since the timing of settlement varies widely among

cases, the observed post-settlement periods differ across workers. For workers who were injured in 2004 and received a settlement by the end of 2005, we observed at least three years of post-settlement employment behavior. For workers who received a settlement in the last quarter of 2007, we observed only four quarters of post-settlement employment behavior.

C

HARACTERISTICS OF

W

ORKERS WITH

R

EDEMPTIONS

Table 3.1 provides background information for our sample by comparing characteristics of injured workers with and without a settlement. Most of the characteristics of the workers presented here rely on measures at the time of an injury. We found that workers with a settlement tended to be older—the average age of workers with lump-sum settlements in our sample was 43 years, compared with 41 years among workers with no lump-sum settlements. This likely reflects an age-related increase in injury severity, or a greater likelihood of accepting a settlement if they are being offered one. In addition, we found that workers with lump-sum settlements tended to have lower preinjury earnings than those without a settlement—workers with a settlement earned 15 percent less in the year prior to an injury than workers who did not receive a settlement after their work-related injury. This finding is consistent with the shorter tenure observed for workers with the settlement—among workers with a settlement, 24 percent had been with the employer for only one or two quarters compared with 18 percent among workers with no settlements. We also found that workers who ultimately received settlements tended to be employed at smaller companies. Only 22 percent of workers with a settlement were working for employers with over 1,000 workers, compared with 27 percent for workers with no settlements. This finding likely reflects the additional costs of returning injured workers back to work for smaller companies, since they may have fewer opportunities to accommodate

3 Inclusion of the workers who received a settlement in 2008 may bias the estimates of the change in average

employment. If these workers were included, they would contribute to the estimates of the average employment at the time of the settlement, but they would not be included in the estimates of the average employment one year after a settlement (since we do not have their earnings information in 2009). If we included these workers, we may overstate the extent of employment recovery after a settlement, since these workers were less likely to be employed at the time of the settlement.

4 We also retained information for 10,980 workers with an indemnity injury who did not receive a settlement in the time frame of this study. These workers are used for limited comparisons in this chapter and in the Technical Appendix. 5 The two data sets were merged in a way that ensured the confidentiality of both the workers’ compensation and unemployment insurance information. At no time did WCRI staff have access to individual identifiers.

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various work restrictions.

Estimates in Table 3.1 also suggest that workers who ultimately received lump sums tended to have more severe injuries. They spent more time on temporary disability and they had higher medical costs than workers with no lump sums.6 Workers with lump sums spent on average 35 weeks on temporary disability,

compared with 12 weeks for workers with no settlements. Workers with settlements were more likely to have injuries to their backs. It is not surprising, therefore, that they received more in indemnity benefits than workers without settlements. Workers in our lump-sum sample received over $60,000 as indemnity benefits, with an average lump-sum amount of over $48,000 (with the median lump-sum payment of $35,100).

Table 3.1 Descriptive Statistics for Workers with an Indemnity Injury with and without a Settlement

Indemnity Injury, with Lump Sum with No Lump Sum Indemnity Injury, Percentage Point Percentage or Difference

Observations 2,138 10,980

Worker characteristics

Age (mean) 43 41 6.4

Age (median) 44 41 7.3

Age group categories (percentage of cases)

15 to 24 years 4% 10% -6.1 25 to 35 years 17% 22% -4.9 35 to 45 years 32% 29% 3.4 45 to 55 years 31% 26% 4.7 55 to 65 years 14% 11% 3.4 Over 65 years 1% 2% -0.5 Percentage male 61% 68% -6.8 Percentage married 50% 50% -0.4

Preinjury average weekly wage (mean) $621 $677 -8.3

Preinjury average weekly wage (median) $533 $604 -11.8

Preinjury annual earnings (mean) $25,286 $29,814 -15.2

Preinjury annual earnings (median) $22,240 $27,123 -18.0

Tenure groups (percentage of cases)

1 or 2 quarters with the employer 24% 18% 6.0

3 or 4 quarters with the employer 15% 15% 0.2

Over a year with the employer 59% 66% -6.6

Type of injury (percentage of cases)

Neurologic spine pain 11% 4% 7.2

Spine sprains and strains 21% 15% 6.3

Fractures 5% 12% -7.5

Lacerations and contusions 5% 11% -6.0

continued

6 Note that about 3 percent of claims in the “no lump-sum” subsample in Table 3.1 were still open at the time of evaluation. Some of these cases may ultimately receive settlements which may increase their indemnity payments.

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Table 3.1 Descriptive Statistics for Workers with an Indemnity Injury with and without a Settlement (continued)

Indemnity Injury, with Lump Sum with No Lump Sum Indemnity Injury, Percentage Point Percentage or Difference

Inflammations 9% 8% 0.6

Other sprains and strains 19% 19% 0.2

Upper extremity neurologic 4% 4% -0.5

Other injuries 26% 26% -0.2

Defense attorney is present 89% 5% 84.2

Detroit metropolitan area 44% 43% 0.6

Industry (percentage of cases)

Manufacturing 26% 25% 1.0

Construction 12% 11% 0.7

Clerical and professional 8% 8% 0.5

Trade 11% 12% -0.9

High-risk services 22% 22% -0.6

Low-risk services 17% 14% 2.2

Other industry 4% 7% -2.8

Industry is missing 3% 4% -1.1

Average employer size at the time of an injury 1,662 1,966 -15.5

Median employer size at the time of an injury 219 256 -14.5

Employer size groups (percentage of cases)

1 to 49 workers 20% 19% 1.6

50 to 249 workers 33% 31% 2.1

250 to 999 workers 25% 23% 2.1

Over 1,000 workers 22% 27% -5.8

Total medical payments (mean) $14,160 $7,627 85.7

Total medical payments (median) $6,380 $3,325 91.9

Total indemnity payments (mean) $61,038 $5,358 1,039.1

Total indemnity payments (median) $42,180 $2,038 1,970.0

Lump-sum settlement (mean) $48,087 n/a

Lump-sum settlement (median) $35,100 n/a

Weeks of temporary disability (mean) 35 12 184.0

Weeks of temporary disability (median) 13 5 146.1

Percentage with no temporary disability

payments 43% 0%

Number of quarters from the injury quarter to

settlement (mean) 8 n/a

Number of quarters from the injury quarter to

settlement (median) 8 n/a

Note: The sample includes workers who were injured in Michigan in calendar year 2004. Claim costs are evaluated as of December 2008.

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Table 3.1 also highlights several important features of the system. First, workers did not receive lump sums right after an injury. On average, workers in our sample received lump-sum settlements 8 quarters after an injury. Within 6 quarters after the injury about 25 percent of workers received a settlement, and within 10 quarters after the injury about 75 percent of workers received a settlement. This suggests that changes in employment after a settlement are unlikely to reflect the initial disabling effects from an injury, although they may reflect potentially slow recovery if workers received their settlements before the extent of the permanency of their condition was established. Furthermore, Table 3.1 highlights important differences between settlements. While many workers received lump sums after initially receiving temporary disability benefits, in some cases workers received only a settlement. The latter may reflect claims where disability was initially disputed and the settlement may have included payments for past temporary disability as well as future wage losses. In 43 percent of cases, workers received only a settlement and did not receive regular temporary disability benefits.

O

UTLINE OF THE

E

MPIRICAL

A

PPROACH

We performed our empirical analysis in several steps, following the empirical questions that were outlined in Chapter 1. To examine employment changes after a settlement, we compared workers’ employment status in the settlement quarter and in the quarters after the settlement. This analysis helped us identify several types of workers based on their employment histories. Some workers were not employed at the time of the settlement and found employment after the settlement. Other workers were employed at the time of the settlement but later exited employment. Yet another group includes workers who did not change their behavior—these workers were either consistently employed before and after the settlement or they were not working throughout the period.

We started by examining the sample of workers who were employed at the time of the settlement and stopped working shortly after receipt of the lump sum. This pattern of employment change helps us understand how many workers may have exited employment after a settlement. We also examined the characteristics of these workers.

For this discussion, we initially compared the differences in employment at the time of the settlement and one year after the settlement. We chose this time period to reflect medium-term adjustments in the labor supply, since it may take some time for injured workers to find a job. We can expect that the job search process in Michigan may take longer than in other states due to the relatively more depressed labor market. Furthermore, our focus on employment experience up to four quarters after a settlement reflect data limitations that we have complete employment records for all workers only through about four quarters after the settlement—we did not observe employment information for some of the workers beyond the fourth quarter after the settlement. Therefore, employment measures beyond the fourth quarter after a settlement may reflect a selected sample—these workers tended to receive settlements earlier after an injury.7

We then extended the analysis by presenting employment exit rates in each of the quarters before and after the settlement. Similar to the comparisons above, this measure captures how many of the workers who were employed in a particular quarter were no longer employed in the following quarter. Unlike the

7 For instance, employment measures eight quarters after a settlement exclude workers who received settlements in 2007, since we only have employment data through 2008.

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previous measure, which examined the employment transition one year after a settlement, this measure captures employment transitions on a quarterly basis. We provide this measure by estimating the fraction of

workers who were not employed among all workers who were employed in the previous quarter.8 An

increase in employment exit in the settlement quarter may indicate that settlements lead to an immediate increase in the fraction of workers who stop working.

We proceeded by examining the sample of workers who were not employed at the time of the settlement and entered employment after receipt of the lump sum. This pattern of employment change helps us understand how many workers may have returned to work after the settlement. As with the measure of employment exit discussed previously, we present estimates of employment entry at an annual as well as a quarterly basis. A quarterly measure of employment entry reveals whether workers who were not working in the previous quarter found a job in the subsequent quarter. We captured this by estimating the fraction of workers who became employed among all workers who were not employed in the previous quarter. 9 An increase in employment entry in the quarter after the settlement may indicate that settlements lead to an increase in the fraction of workers who re-entered employment. We also paid attention to the patterns of employment entry before a settlement quarter, since a dip in employment entry before a settlement may indicate that workers were delaying employment entry in anticipation of the settlement.

These patterns of employment behavior (leaving employment and returning to work) also help us better understand changes in average employment after a settlement, which we present as part of our analysis. In particular, we compare average employment in each of the quarters relative to the settlement quarter for the full sample of workers with settlements in Michigan.

The analysis outlined above is descriptive in nature since we do not have an appropriate comparison group of workers who did not receive a settlement. Differences in residual injury severity preclude comparisons with workers with a medical-only injury or workers with indemnity benefits without a settlement. Workers with and without a settlement may change their employment due to layoffs, childcare demands, going back to school, or the illness of a spouse. At the same time, workers with settlements may also change their employment in response to the settlement, as well as to the changes in unobserved residual injury severity. As a result, we cannot isolate the effect of the settlement by comparing workers with and without a settlement. Such an analysis can be conducted in states that allow multiple approaches for paying PPD benefits. Some states, for instance, allow PPD benefits to be paid either as a settlement or as a stream of periodic payments. The effect of the settlement may be identified by comparing these two groups of workers (as was done by Hyatt, 2010). Most of the payments for permanent injuries in Michigan, however, are paid as a lump-sum settlement, which limits the possibility of these types of comparisons. As a result, we are left with comparisons of employment patterns for the same workers’ before and after a settlement, which is a focus of the main body of this report, while some comparisons of labor force participation rates of workers who did and did not receive settlements is provided in Technical Appendix. Large changes in the measures around the quarters of the settlement may suggest the possibility of a response to the settlement.

Focus on large changes in the measures of employment entry may help provide some information

8 The individual labor market exit measure is set to one in a quarter if the claimant worked in the current quarter and did not work in the next quarter, zero if the claimant worked in both current and next quarter, and missing otherwise. Basically, this measure reflects the fraction of workers who exit employment in a quarter.

9 The individual labor market entry measure is set to one in a quarter if the claimant did not work in the prior quarter and worked in the current quarter, zero if the claimant worked in neither the prior nor the current quarter, and missing otherwise.

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about potential costs that lump sums may create. One may be concerned that workers may delay return to work in anticipation of the settlement. We may observe this phenomenon when examining quarterly employment rates in the quarters prior to the settlement. A drop in employment entry rates just before a settlement may imply that some of the workers choose to delay their return to work.

In our final step, we examined whether employment changes differed by worker and claim characteristics. This analysis compares trends in average employment for different subgroups of workers based on age, tenure, gender, injury type, and settlement type. To isolate the effects of just the variables of interest, we constructed those employment trends based on linear regressions that controlled for the main characteristics. The details of this method are presented in the Technical Appendix. This method allowed us to examine the correlation between factors that are hypothesized to affect employment rates in each quarter. One advantage of the regression approach is that it isolates the effect of each separate factor from the effects of the other factors in the model.

When reporting employment trends for this final step, we showed the effect of each factor by contrasting the predicted probability of being employed in each quarter in an average case under alternative values for the factor of interest. This approach holds constant all other factors in the model. To illustrate the effect of age on the likelihood of employment, we computed the predicted value for workers and claims that are otherwise identical, except that one group had workers who were under 35 years old, another had workers who were 35 to 44 yeas old, a third group included workers who were 45 to 55 years old, and a fourth group had workers who were over 55 years old. The role of workers’ age is reflected in the different employment rates in each age group after controlling for many other factors that may affect return to work.

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4

R

ESULTS

In this section of the report we discuss the results of our analysis. First, we provide an aggregate look at the issue by presenting changes in the average employment among all workers in our sample. Then, we provide details of the behavioral responses that may explain employment changes. We focus on two main behavioral responses to a settlement—leaving employment and returning to work. In particular, we examine whether workers who were not employed at the time of settlement find employment shortly after receipt of the lump sum. We also examine whether workers who were employed at the time of settlement stop working shortly after the receipt of the lump sum. After that, we explore how employment trends may have differed by important worker and claim characteristics. This helps us better understand the role of workers’ characteristics in employment changes. For each of the findings we also discuss potential hypotheses that may explain the findings.

C

HANGE IN

A

VERAGE

E

MPLOYMENT

R

ATE AFTER A

S

ETTLEMENT

We found that the average employment rate increased after a settlement. Employment estimates in Figure 4.1 suggest that while 25 percent of workers were employed in the quarter of the lump-sum settlement, 32 percent of workers were employed four quarters after the lump-sum settlement.1 The difference between

the periods is statistically significant at the conventional levels.2 This transition is characterized by a gradual increase in average employment—about 25 percent of workers were employed in the first quarter after the settlement, 28 percent were employed in the second quarter after the settlement, and 31 percent of workers were employed in the third quarter after the settlement.

1 We used the settlement quarter as a base employment measure in this analysis. In this chapter, we disregard the decline in employment in the quarters before a settlement observed in Figure 4.1. Average employment measures before a settlement may be misleading since the sample includes workers with different amounts of time between an injury and a settlement. Some workers in our sample received a settlement relatively quickly after their injuries, while other workers received settlements years after their injuries. Since all workers are employed at the time of the injury, the average employment rate before a settlement may be misleading if some of the workers might have had only two quarters between an injury and a settlement. Analysis in the Technical Appendix presents employment estimates by subgroups based on the number of quarters between an injury and a settlement.

2 Figure 4.1 provide estimates of the 95 percent confidence interval for the average employment rate in each quarter. The standard error of the estimate of the mean of a variable that only takes value of 0 or 1 (as is the employment measure used here) may be estimated using binomial distribution as p

(

1−p

)

n, where pstands for the average value of the variable in question (expressed as a fraction) and

n

denotes the number of observations. The standard error of the employment in the settlement quarter is .25

(

1−.25

)

2138=0.0094, and the standard error of the employment one year after a settlement is .32

(

1−.32

)

2138=0.0101. Since the confidence intervals for the employment measures in settlement quarters and one year after the settlements do not overlap, the difference between the two measures is statistically significant.

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Figure 4.1 Average Employment Rate before and after the Settlement with Confidence Intervals 31% 31% 32% 33% 32% 31% 28% 25% 25% 25% 27% 0% 5% 10% 15% 20% 25% 30% 35% 40% -2 -1 0 1 2 3 4 5 6 7 8

Quarter from Settlement (settlement in quarter 0)

Percentag

e Emplo

yed

% Employed 95% Confidence Intervals

Notes: The sample includes workers who were injured in Michigan in calendar year 2004 who later received a lump-sum settlement. The 95 percent confidence interval reflects values of the average employment rate for which the difference between the estimate and the observed measure is not statistically significant at the 5 percent level.

Estimates of the average employment rate presented in Figure 4.1 mask significant complexity of the employment behaviors underlying the average measure. Although we observed that the average employment rate increased by 7 percentage points within a year after a settlement, it does not mean that only 7 percent of workers changed their behavior. Likewise, even though we found no change in average employment between a settlement quarter and one quarter after a settlement, it does not imply that no workers had changed their employment. It is normal to expect that in every quarter some workers may choose to enter employment, while other workers may choose to stop working. We examine these patterns of behavior next.

E

MPLOYMENT

B

EHAVIORS AFTER A

S

ETTLEMENT

We explain employment trends in Figure 4.1 by exploring workers’ underlying behavior after a settlement. We examine different employment transitions based on the workers’ employment status in the quarter of the settlement. Workers who were already employed at the time of the settlement have the option of remaining employed or leaving employment. Workers who were not employed at the time of the settlement may choose to remain not employed or to return to work.

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