New Estimates of the Labor Market Effects of Workers' Compensation Insurance

Abstract

The workers' compensation laws are one of the earliest examples of a government mandated employer provided benefit. Under a combination of federal and state laws, employers have a statutory obligation to provide medical and income benefits to injured workers. In most states, employers are required to purchase insurance to meet their financial responsibility. Recently, there has been growing legislative support for expanding the scope of mandated benefits to include items such as parental leave and health insurance. The political attractiveness of mandated benefits is that they do not require an increase in taxes, and that they represent a political compromise between liberals and conservatives over how best to carry out social policy [22]. The labor market consequences of mandated benefits are potentially large and not well documented in the literature. The fundamental issue is to what extent an increase in benefits, which represents an increase in employer costs, is offset by lower wages. Previous studies that have attempted to measure such compensating differentials have reached dissimilar conclusions over the size and even the direction of the effects.' The findings from studies examining the effect of workers' compensation insurance on wages tend to be more consistent, often finding a negative effect, but are also characterized by considerable diversity. Thus, past research does not provide enough information to make an informed policy decision and continued research in this area is clearly warranted. The purpose of this paper is to provide new evidence on the effect of workers' compensation benefits on the labor market. In particular, the paper examines the tradeoff between wages and workers' compensation benefits and the relationship between workers' compensation benefits and job safety. The primary contribution of this paper is to identify two previously overlooked