The Effects of Workers' Compensation Benefits on Time Off Work, Medical Care, Health Outcomes and Welfare

This paper estimates how increases in the workers' compensation income benefits affect disability duration, medical care utilization, and health outcomes. Additionally, it assesses the welfare effect associated with the current benefit policy. Workers' compensation insurance provides income benefits if a workplace injury causes an employee to miss work. Looking at administrative claims data from self-insured companies from 2004 to 2016, I estimate the effects using variation in income benefits caused by the 2007 New York workers' compensation reform. I find that a 10 percentage point increase in the wage replacement rate led to an additional 3.4 days off work, implying that the duration-benefit elasticity is 0.53. However, medical care utilization did not increase as a result of expanded benefits and delayed return to work, and workers' health outcomes remained the same when they were on workers' compensation disability leave. Upon return to work, each extra day off work decreased the hazard rate of getting re-injured by 2.9 percent. Given these estimates, I find that the current benefit level in New York is close to optimal. Specifically, a $1 increase in the weekly benefits would increase a worker's utility by the equivalent of a 3.2 cent increase in the weekly wage.