Determining Diminished Earning Capacity: 'SEDEC' 2

Saturday, April 23, 2005 | 0

Ed Note: Though this article deals with specific California laws, some of the concepts are universal thus we have chosen to publish this article for all states.

The SEDEC Method - Part Two

In the first part of this article, the author provided the background for the development of the SEDEC Method for determining diminished earning capacity within Californias new permanent disability rating system. This article reviews the sequential steps to the SEDEC Method and is useful where the determination of lost earning capacity is an issue.

The SEDEC Method described below focuses on these sequential steps.

The SEDEC Method

The SEDEC method is proposed to facilitate development of empirically derived Vocational Rehabilitation expert opinion and evidence that is useful within the PDRS. The basic steps of the SEDEC method and formula are described below.

Stepwise Estimate of Diminished Earning Capacity (SEDEC)

1. Determine historical average earnings & convert to hourly rate;

2. Determine single job and/or pool of jobs that most reasonably offer greatest employment potential to worker;

3. Calculate average median entry-level hourly wage for job or pool of jobs;

4. Calculate average median experienced wage (with 3-5 years experience) for job or pool of jobs;

5. Determine pre-injury worklife;

6. Consider potential loss due to reduced worklife;

7. Calculate loss scenarios using SEDEC formula;

8. Develop alternative scenarios to consider impact of receiving Vocational Rehabilitation, training, etc.

SEDEC Variables

-- Pre-injury hourly wage rate (A)
-- Post-injury entry-level hourly wage rate (B1)
-- Post-injury experienced hourly wage rate (B2)
-- Entry-level hourly earnings difference (C)
-- Experienced hourly earnings difference (D)
-- Percentage earnings loss during entry-wage period (C1)
-- Percentage loss during experienced wage period (D1)
-- Pre-injury years of worklife (WL1)
-- Entry level earnings period (typically 3-5 years) (P1)
-- Entry level earnings period, expressed as percentage of worklife (P2)
-- Experienced earnings period (P3)
-- Experienced earnings period, expressed as percentage of worklife (P4)
-- Adjusted % earnings loss during entry wage period (AC1)
-- Adjusted % earnings loss during experienced wage period (AC2)
-- Total percentage loss of earnings capacity (AC3)

Optional Adjustment for Reduced Worklife due to Disability ,

-- Post-injury years of worklife, reduced by disability (WL2)
-- % loss of worklife due to disability (WL3)
-- Entry level earnings period, expressed as % of reduced worklife (P5)
-- Experienced earnings period, expressed as % of reduced worklife (P6)
-- % loss of earnings capacity in entry wage period, adjusted by reduced worklife (AC4)
-- % loss of earnings capacity in experienced wage period, adjusted by reduced worklife (AC5)
-- Total percentage loss of earnings capacity, adjusted by reduced worklife (AC6)

The SEDEC Formula:

A - B1 = C ? A = C1
A - B2 = D ? A = D1
P1 ? WL1 = P2
WL1 - P1 = P3
P3 ? WL1 = P4
C1 x P2 = AC1
D1 x P3 = AC2
AC1 + AC2 = AC3

Optional Adjustment for Reduced Worklife due to Disability

WL1 - WL2 ? WL1 = WL3 (expressed as %)
(AC3 x WL3) + AC3 = AC4

Case Example:

-- 40 y.o. male Carpenter with less than a HS education has pre-injury earnings of $20/hour (A)
-- Entry-level post-injury earnings are projected @ $10/hour (B1)
-- Entry-level earnings difference is $10/hour (C)
-- Entry-level period earnings loss is 50% (C1)
-- After 5 years, experienced earnings are projected @ $14/hour (B2)
-- Percentage earnings loss @ experienced wage is estimated @ 30% (D1) ($20 -14 = $6/hour, a 30% loss) (A - B2 = D ? A = D1)
-- Pre-injury worklife is estimated @ 25 years (WL1)
-- Percentage of WL1 subject to entry wages is 20% (P2) (entry wage period is 5 years, which is 20% of 25 years (WL1))
-- Percentage of WL1 subject to experienced wages is 80% (P3) (80% x 25 years = 20 years)
-- Adjusted % earnings loss during entry wage period is 10% (AC1) (50% (C1) x 20% (P2) = 10%
-- Adjusted % earnings loss during experienced wage period is 24% (AC2) (30% (D1) x 80% (P3) = 24%
-- % of lost earnings capacity over remaining worklife is 34% (10% + 24% = 34%) (AC1 + AC2 = AC3)

Estimated Diminished Earning Capacity over Worklife is 34%

Optional Adjustment for Reduced Worklife due to Disability[i,ii]

-- Post-injury worklife is estimated at 20 years
-- % loss of lost worklife due to disability is 20% (25 - 20 = 5 ? 25 = 20%) (WL1 - WL2 ? WL1 = WL3)
-- Additional % lost earnings capacity due to reduced worklife is 6.8% (AC4) (AC3 x WL3)
-- Total % lost earning capacity with reduced worklife is 40.8% (AC3 x WL3) + AC3 = AC4

Estimated Diminished Earning Capacity, Adjusted for Reduce Worklife = 40.8%

End Notes: -- i. Standardized BLS worklife data based upon age, gender, race & level of education;

References:

* Millimet, Nieswiodomy, Ryu, Slottje (2002) Estimating Worklife Expectancy: An Econometric Approach. Department of Economics, Southern Methodist University: Dallas, Texas;
* Ciecka, Donley, Goldman. Work Life Estimates at Millennium's End: Changes over the Last Eighteen Years. Illinois Labor Market Review: (Vol. 6, No.2 Summer, 2000);
* Smith, S. Revised worklife tables reflect 1979-80 experience. Monthly Labor Review: August, 1985.

-- ii. Labor force participation rates that take disability into account

References:

* McNeil, J. (2000). Employment, Earnings, and Disability. U.S. Bureau of the Census;
* Trupin, Sebasta, Yelin, LaPlante (1997). Trends in Labor Force Participation Among Persons with Disabilities, 1983-1994. Disability Statistics Rehabilitation Research & Training Center, University of California, San Francisco.
* The New Worklife Expectancy Tables (2002) Vocational Econometrics. Louisville, Ky.

About the Author: Robert Hall, Ph.D., Certified Rehabilitation Counselor, Certified Disability Management Specialist. Dr. Hall can be reached at (619) 463-9334. Fax (619) 463-9337, or e-mail at info@rehabsource.org.

-------------------------------

The views and opinions expressed by the author are not necessarily those of workcompcentral.com, its editors or management.