Why Pay More? the Effects of Increased Wage Replacement Benefits in Workers’ Compensation

Workers’ Compensation insurance provides income security via wage replacement payment if a workplace injury results in lost work time for an employee. This paper estimates the effects of increases in Workers’ Compensation wage replacement payments on time out of work, medical services use and health outcomes. The sample includes claim data from self-insured companies in New York from 2004 to 2016. The study design uses the variation in the wage replacement rate caused by the annual increases in the maximum weekly indemnity payment brought by the 2007 Workers’ Compensation reform. This study has three findings. First, a 10-percentage point increase in the wage replacement rate leads to an additional 3.8 days off work. The estimated elasticity is 0.48. Second, workers did not consume more medical services as a result of increased benefit and delayed return-to-work, and the short-term health outcomes remained unchanged. Third, an extra day off work decreases the likelihood of getting re-injured by 3.3 percentage points. The study results indicate that a policy that increases Workers’ Compensation benefit is costly to employers in the short-term, but it is cost-saving to employers in the long-term by reducing expenses associated with re-injuries. Workers benefit from the policy by enjoying longer time off work and subsequently incurring fewer re-injuries.