This study examines whether lump-sum settlements of workers’ compensation benefits discourage return to work. Some policy makers express concerns that income effects introduced by large settlements may reduce return to work. Other observers of the workers compensation system indicate that the receipt of a lump-sum settlement may encourage return-to-work—workers may feel a sense of “closure” after a settlement and move on with their lives and careers (Hyatt, 2010). Ultimately, it is an empirical task to determine whether these hypothesized effects are material and which of the effects may dominate. 

Using data for workers injured in Michigan merged to administrative quarterly records on employment and earnings, we examine how workers’ employment changes before and after a settlement. We find that about 7 percent of workers in our sample stopped working after a settlement—they were employed at the time of a settlement and were no longer employed 1 year after a settlement. At the same time, even higher percentage of workers return to work. About 15 percent of workers in our sample were not employed in the settlement quarter, and were employed a year after a settlement. These two patterns of responses contributed to 7 percentage points increase in average employment after a lump-sum settlement. While 25 workers in our sample were employed at the time of the lump-sum, 32 percent of workers were employed 1 year after a settlement. This evidence is generally consistent with greater importance of the “closure effect”—closing out a claim helps workers restart their careers that may have been stopped due to a disabling injury.

We also examine whether workers may delay their return to work in anticipation of the settlement. We find little evidence of this behavior in the full sample of claim that we examine—the dip in employment re-entry rate in the settlement quarter is relatively small. At the same time, when we focus on workers with longer duration of time between an injury and a settlement, we find a greater drop in employment entry rate just before a settlement. Some workers in this sub-sample were able to delay their return to work and returned to work only after the settlement.

We also explore heterogeneous responses to the settlement based on the worker and settlement characteristics. We find an increase in employment after a settlement for workers who were less than 55 years old and a slight decline in employment for workers who were over 55 years old. We find little differences in the response to the settlement for other worker or injury characteristics.