The Effort of Labor Force Age Distribution on Worker's Compensation Costs

Abstract

Workers' compensation insurance is funded by premium payments from employers. The premium is determined by legislated coverage and benefits, industry category, and in some cases, employer accident record. Researchers have concentrated on the cost effect of changes in legislation. In this study, attention is focused on the age distribution of the insured individuals. Workers' compensation cost per unit of exposure varies by age group. Changes in the age distribution of the workforce induce changes in the cost of workers' compensation. Workers' compensation (WC) premiums are based on the location of the firm, the industry classification of the enterprise, and in some cases the accident record of the firm. Firm location is important since it determines the WC system and, therefore, the set of benefit provisions to which the firm is subject. Industry classification affects premium size because WC insurers track injury experience by industry group. However, the demographic characteristics of the pool of insured individuals (workers) do not directly enter the calculation of expected WC costs, although such characteristics directly affect insurance premiums in programs such as life and auto insurance. This unique trait of WC insurance has influenced the focus of WC studies, especially those conducted since the early 1970's. Liberalization of benefits and the increased rate of inflation drove WC costs up rapidly after 1970.1 In response a series of commissions and task forces has analyzed WC costs emphasizing factors that influence total dollar compensation for a given injury or number of injuries.2 In this study of WC costs the emphasis is on determinants of the number and severity of injuries. Specifically, the two-fold purpose of the study is to Alan E. Dillingham, Illinois State University. This research was funded by Illinois State University and, through the Workers' Compensation Project of the University of Connecticut, the Employment Standards Administration of the U.S. Department of Labor. An expanded version of this paper will appear in Safety and the Workplace: Incentives and Disincentives in Workers' Compensation, edited by John Worrall (New York: ILR Press, 1983). 1 Price [141 calculates the 1970-76 increase in employer costs for WC at 126 percent. Elson and Burton [61 estimate that their adjusted manual rate for WC coverage almost doubled between 1972 and 1978. 2 The two major efforts were: (a) the National Commission on State Workmen's Compensation Laws and (b) the Interdepartmental Workers' Compensation Task Force.