Association for Public Policy Analysis & Management

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, as well as the welfare effect brought by the current benefit level.

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 resulted from the annual increases in the maximum weekly wage replacement payment following the 2007 Workers’ Compensation reform. This study has four findings. First, a 10-percentage point increase in the wage replacement rate led to an additional 3.4 days off work. The duration-benefit elasticity is 0.53. 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, in the long-term, an extra day off work decreased the hazard rate of re-injury by 2.9 percent. The 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 repeated injuries. Fourth, the welfare analysis suggests that the current wage replacement benefit is near optimal. A slight increase in the benefit would enhance workers’ welfare, though the marginal gain is not significant.