Age-Earnings Adjusted Projection. In a projection of future earnings, future earnings capacity, or job-related fringe benefits , projections may be made on a “constant growth rate” or an “age-earnings adjusted growth rate” basis. An age-earnings adjusted set of growth rates implies a projection of future earnings that take into account the more rapid growth rates a worker could expect when in the teen’s or 20's, somewhat lower but still above average rates in the 30's, and average or below average rates after some point in the 40's.
Age-Earnings Cycle. The typical pattern of earnings over the entire working life of a worker. When a worker first enters the work force in the worker’s late teens or 20's, starting pay increases at a higher than average growth rate. That growth rate continues at an above average rate in the the 30's, but then levels into average and then below average growth rates in the 40's and 50's. Some data sources suggest actual declines in the middle to late 50's, but economists disagree about whether this is an actual result or an artificial consequence of the way data are collected. This pattern is dependent on both age and gender. In general, the more education a worker has, the later in life that worker will reach the various stages in the age earnings cycle. Women with a given level of education tend to have flatter age-earnings patterns than do men, i.e., smaller rates of increase and decrease of earnings than men.
Amicus brief. Amicus means “friend” in
Latin. Thus, an amicus brief is a brief filed with a court in support
of the position taken by another party. The individual or more usually
the group filing the amicus brief is not a party to the litigation, but
feels that its interests may be affected by the results of the
Annuitant. In a Life Annuity/Straight Life contract, an “annuitant” is an individual whose continued life will be used in determining how long the annuity payments will continue to be paid. Technically, the annuitant may or may not be the “beneficiary” (or payee) of the contract who receives payments guaranteed under the contract. However, in most annuity contracts, including defined benefit pensions, the annuitant(s) and beneficiary(s) are the same person or persons. In many defined benefit retirement pensions, both a worker and his or her spouse are both annuitants and beneficiaries. The “owner” of the annuity contract may be still another person or business unit. (See Settlement Annuity.)
Annuitist. An annuitist is typically a salesperson who specializes in obtaining prices for and the placement of annuities meeting special requirements with life insurance companies. If an annuity approach for providing for the life care needs of an injured person in a personal injury action is followed, an annuitist specifies the terms which are to be included in the wording of an annuity contract and obtains prices from insurance companies that are willing to underwrite such contracts."
Annuity Contract. An annuity contract is an agreement between the owner of the contract and the issuing life insurance company that provides for benefit payments to be made to at least one beneficiary or payee. The contract may be for a fixed period of time or for a period of time contingent upon an annuitant’s life. For example, the contract might specify that the issuer of the contract will pay the annuitant of the contract monthly benefits starting of $1,000 per month and increasing by four percent at each anniversary of the contract for either a fixed number of years or the remainder of the annuitant’s life. Either the annuitant, or someone on the annuitant’s behalf, will have paid (at least) an immediate single lump sum premium to the issuer to initiate this flow of payments.
Arithmetic Difference (in a net discount rate). In the original definition of the real interest rate developed by Irving Fisher (in his Theory of Interest,1930), the real interest rate is the arithmetic difference between the market (nominal) rate of interest and the expected rate of inflation. In this formulation, if the nominal rate of interest is 7 percent and the expected rate of inflation is 4 percent, the real rate of interest is 3 percent. The rate subtracted from the market rate of interest could instead be an expected or past actual rate of wage increase, rather than the rate of price inflation. A numerical subtraction of this sort from a starting market interest rate, which could be either an expected rate of inflation or an expected rate of wage increase, would be referred to as an “arithmetic difference.” The analytically correct way to calculate the difference between a discount rate and an expected inflation rate (or wage growth rate) is to calcululate the geometric difference between the discount rate and inflation rate rate. This is done by dividing (1 + the discount rate in decimal terms) by (1 + the expected rate of inflation decimal terms) and subtracting 1. Thus, with a discount rate of 7 percent and an expected rate of inflation of 4 percent, one would divide 1.07 by 1.04 = 1.0288461. Subtracting 1, the remainder is 0.0288461, or a 2.88461 percent real interest rate.
Average Tax Rate. Total taxes divided by a person's income, also known as "effective tax rate." Normally, this term refers only to income and payroll taxes and excludes payments for sales taxes, real estate taxes and other taxes that are not based on a person's income."
Base (for any projection). Any projection of a future stream of values must have a starting value from which the projection is made. That starting value is the “base” for the projection.
“Below Market” Discount Rate. A term used in Jones & Laughlin Steel Corp. v. Pfeifer 103 S.Ct. 2541 (1983) and also in the following 5th Circuit Case, Culver v. Slater Boat Company (Culver II) F.2d 114 (1983). Economists have disagreement about the specific meaning of this term in these cases, and over the question of whether the two courts indicated the same meaning for the term. In all interpretations, however, it means employing a rate of discount that is below the existing market rates of interest. Some economists believe that it refers to any interest rate calculated to remove the effects of inflation by deducting the change in the general price level or average wage increase from the market rate of interest. In other words, it could refer to either the real interest rate or the net discount rate, calculated either as an arithmetic difference or a geometric difference. Others have argued that the “below market discount rate” refers specifically to the Geometric Difference between the market rate of interest and the nominal rate of projected wage increase, in other words, the net discount rate, calculated only on a geometric difference basis.
Benchmark Approach. Any approach in which an economic expert provides a specific value for a given category of loss, but that value is characterized as “being in the ball park” or “indicative” of the probable value, rather than as a precise measure of loss. Some economists use this term to characterize the method defined below as an “Index Approach.”
Benchmarking. This practice usually refers to comparison to or derivation from some group that is considered to be the "norm." As such, it is not specific to the object being evaluated. It is much like the use of an average, median or "typical" value.
Bright Line. A “bright line” in a legal decision refers to a simple clear distinction. Many legal principles involve balancing of considerations to determine which legal principle is most important in a given instance. A “bright line” indicates that a single binary criterion determines what should be done. For example, in Regional Airport Authority v. LFG, LLC, 2006 LEXIS 21035; 2006 FED App. 0302P (6th Cir.) the 6th Circuit referred to its requirement that any material provided by a party to an exert witness must be disclosed to the opposition regardless of attorney work product considerations or any other considerations as a “bright line” distinction under Rule 26 of the Federal Rules of Civil Procedure.
Champerty. A legal term used for selling an interest in the outcome of a litigation. Historically, English and American common law has prohibited champerty, but many companies now invest in lawsuits and many state courts allow them to do so. Because the market in litigation funding is growing, this issue is being litigated more and more.
Cohort. In demography, a cohort is a hypothetical group of individuals who are assumed to face the same probabilities of the future events being analyzed: survival or death, labor force participation, employment, morbidity, marital state, or other variables of demographic interest. A cohort is usually distinguished by age and sex, and may also be distinguished by race, education, marital state, and other variables.
Compensation. (1) Compensation of losses suffered by victims and deterrence of negligent behavior by potential tort malfeasors are the primary objectives for awards of damages in litigation over torts. The “make whole” principle, which means making the victim as well off as if the tort had not occurred, is the normal standard for compensation. (2) May also refer to compensation for labor performed, including both wages and job related fringe benefits.
Constant-Rate Projection. In a projection of future earnings, future earnings capacity, or job-related fringe benefits, projections may be made on a “constant growth rate” or an “age-earnings adjusted growth rate” basis. With a constant growth rate projection, a single rate of growth in earnings is employed, based on the average expected rate of earnings growth for that worker over the remainder of that worker’s work life or work life capacity. Over the entire age-earnings cycle for a worker, a correct constant rate would be too low in younger years and too high in older years, but the average rate would be correct for the entire worklife.
Contingent Valuation Studies. Contingent valuation studies are surveys of consumers, which focus on asking consumers how much they would be willing to pay for various “contingent” components of goods or services. As used in the “value of life” literature, contingent surveys ask how much consumers would be willing to pay for safety improvements that would reduce risk of fatalities. From that information, a “willingness to pay” value for a whole human life is determined from the aggregate willingness to pay for safety improvements divided by the number of lives saved.
Consumer Safety-Demand Studies. Consumer safety-demand studies rely upon the hedonic technique in econometric theory, applied to consumer purchases of goods and services. This technique allows market prices paid by consumers for goods and services to be broken down into a series of implied “prices” for various characteristics of the goods and services. In studies of automobile purchases, for example, a price would be determined for the speed of the automobile, for the attractiveness of the automobile, for the cost of repair maintenance of the automobile, for its fuel efficiency, and for its safety features if involved in accidents. As used in the “value of life” literature, consumer safety-demand studies focus on the prices determined by hedonic technique for lowered risk of fatalities. A value for human life is determined from the aggregate of prices paid for safety values, divided by the number of lives saved.
Collateral Source. A
collateral source is a third party source for payments for costs
incurred because of an injury or death that come from a source.
“Third party source” means a source of funds other than
coming from the defendant in a legal action. Examples would be private
life insurance that provides financial support for families of a
decedent, disability insurance that provided regular payments to
replace lost earnings, and so forth.
Collateral Source Rule. The collateral source rule is a general legal provision that offsets from damages awarded in tort actions should not be taken because expenses have been paid by a third party who was not responsible for an individual’s injury. In a wrongful death action, for example, the amount won in a tort action from the defendant who caused the death will not be reduced by the amount paid out to the surviving spouse by private life insurance. Amounts paid in the form of disability insurance or disability programs through Social Security typically cannot be subtracted from amounts won in tort actions for lost income, and so forth. The term “collateral source rule” should be used carefully. Many states create exceptions to the general rule that offsets cannot be taken, particularly in medical malpractice cases. Thus, what may be called the collateral source rule in a given state may have important exceptions to the general rule described here. Exceptions are particularly important in New York and California.
Current Opportunity Cost Method. A method for estimating the value of the household production of a full-time homemaker. This method values the home production time of the homemaker on the basis of the earnings the homemaker would be able to earn currently if she were to take full-time employment in the labor market.
Default Risk. With any financial security that promises to make specific dollar payments at specific times in the future, there is some risk that the issuer will not be able to make promised payments. When a promised payment is not made, the issuer is said to be “in default.” Default risk is the risk that a financial security or porfolio of financial securities will not make scheduled payments.
Deterrence. Deterrence of negligent behavior and compensation of losses suffered by victims are the primary objectives for awards of damages in litigation over torts. Optimal deterrence is usually defined as that level of deterrence for which the marginal social benefit associated with additional safety precautions (in the form of reduced probability of an accident and/or reduced size of the resulting damages) equals the marginal social cost of taking such precautions.
Discount Rate. A discount rate is an interest rate that is used to “discount” the value of future expected payments to present value. In effect, a discount rate removes the future interest that a present value sum would earn until a future payment would be expected. If a stream of future payments of $1,000 per year for ten years is “discounted” to present value, the value will be significantly less than $10,000. If that present value is invested in securities with an interest rate that is used as the discount rate, the fund will make scheduled payments, but attract interest on the remaining balance. Over the term of the stream of future payments, the accumulation of interest at the discount rate will provide the fund with monies needed to make all scheduled payments.
Discretionary Fringe Benefit. Job-related fringe benefits may either be “discretionary” or “legally-mandated.” Legally-mandated fringe benefits are represent payments employers are required to make by law. Discretionary fringe benefits are benefits that are not required by law. However, individual workers may or may not have the option to avoid partial payments required for these discretionary benefits.
DOHSA stands for Death on the High Seas Act. This federal act establishes the right of a seaman injured on the high seas to sue for damages in a tort action. Attorneys representing injured seamen typically try to have their claims tried under DOHSA because it has somewhat more liberal rules for proving damages than other types of maritime law.
Earning Capacity. Earning capacity is sometimes presented as an alternative to “expected earnings.” An individual worker’s earning capacity represents the earning potential of a worker, whether or not the worker chooses to earn at that full potential. A worker who could easily find a job in as a machine repairman at $30,000 per year, but works as an artist at $15,000 per year, has an earning capacity of $30,000, but expected earnings of $15,000. In addition to this difference based on annual earnings, earnings capacity is also distinguished from expected earnings in regard to the length of working life. A person may leave the labor force for voluntary reasons (attending school, child rearing, retirement) or for involuntary ones (unemployment, illness, death). Both causes are taken into account in estimating expected earnings, whereas only the involuntary reasons are taken into account in estimating earning capacity.
Equivalence Scale. In the 1960's and 1970's, the Bureau of Labor Statistics devised “Equivalence Scales” to determine equivalent incomes for families at particular standards of living. Some economists have used equivalence scales of this sort to determine the correct deduction for personal consumption and maintenance. Poverty Thresholds are a special type of equivalence scale.
Expected Earnings. Expected earnings is the amount of labor market earnings an individual worker would be expected to earn. This amount may be smaller than the amount of earnings that worker could earn if the worker had chosen a different job or had different work patterns. See the entry for earning capacity.
Family Goods. Family goods are goods such as shelter, heating, air conditioning and other utilities that provide benefits to all family members concurrently. In calculations of personal consumption expenditures for a decedent, these goods are normally not included as part of the personal consumption adjustment because they were benefiting other family members even though they also benefited the decedent.
FELA stands for Federal Employers
Liability Act. This federal act establishes the right of injured
railroad workers or their survivors to sue for damages caused by
injuries or deaths while working for railroads. Some such actions are
brought in state court, but are still governed, in part, by federal
rules for calculating damages. In law, actions that are brought
under maritime law (law regulating shipping of all sorts, both on
riverways and on lakes and seas, have what precedential value in FELA
litigation and vice versa. Thus, the most important single case for
FELA litigation is Jones & Laughlin Steel Co. v. Pfeifer, which is
a maritime case involving an injured barge workers, not a railroad
Fixed Period Annuity. A “Fixed Period Annuity” allows the annuitant to receive contractual benefit payments over a set number of years. At the end of the period, no further benefits are payable for the remainder of the annuitant’s life. However, if the annuitant died during the fixed period, a surviving beneficiary would receive the remaining value by receiving periodic payments to the end of the fixed period, or by receiving a lump sum of equal worth of such payments.
Forensic Economics. The branch of economics that deals with the role of economists in the litigation, both in terms of specific methods of measurement that are used to prepare reports used in litigation, and in terms of the impact that use of economic experts has on the process of litigation itself.
Future Value. The future value of a cash flow is the accumulated number of dollars, including accumulated interest, that will have been paid (e.g. into an account), over a specified period. It is a lump sum of money that represents the total amount paid (including interest) over the period. In actuarial parlance, future value is also called “accumulated value.” (Definition from Boyd Fjeldsted.)
FTCA stands for Federal Tort Claims Act. This litigation defines the right to sue the federal government in a tort action. We did not discuss this, but governments are sovereign and cannot be sued unless they pass specific legislation allowing themselves to be sued. FTCA is the act of Congress that allows individuals to sue the federal government for tort losses. Thus, almost all litigation under FTCA is Somebody v. United States or United States v. Somebody. There have been rulings in FTCA litigation that have looked to Jones & Laughlin Steel Co. v. Pfeifer for guidance. However, FTCA litigation is conducted under state law of the state in which the action has been filed.
Geometric Average or Mean (in a growth projection). A geometric average in a growth projection is a rate which when applied to the base year and all subsequent years results in the figure in an ending year. Thus, if the value of a variable in year one is $1000 and $2000 in year ten, the geometric average rate of increase is the rate which, applied for nine years on an annually compounding basis, would result in $2000 in the tenth year. The geometric growth rate equals the Ending Year Value divided by Beginning Year Value raised to the power of one over the number of years from the beginning year to the ending year minus one. Thus, ($2000/$1000)^(1/9) - 1 = 0.08006 in the example. The arithmetic mean is always greater than the geometric mean except for the trivial case where one is taking the mean of a series of constants. An interesting way to show the difference is to pose the following question: You own a share of stock and it doubles in price from $1,000 to $2000 and then falls 50% back to $1,000, what is you average return? The arithmetic mean is (100% - 50%)/2 = 25%. The geometric mean is ($1000/$1000)^1/2 -1 = 0%.
Geometric Difference (in a net
discount rate). Both the real interest rate and the net discount
rate are “net” rates of interest. The real interest rate is based
on the difference between the market interest rate (“gross discount
rate”) and the rate of inflation. The net discount rate is
the difference between the market interest rate and the expected growth
rate in wages, or earnings. In each case, the difference may be
calculated as an arithmetic difference or a geometric difference.
An arithmetic difference is a simple numeric subtraction between the
two rates. The geometric difference is a
rate which would exactly duplicate the results one would calculate
the market interest rate and either the projected rate of inflation or
projected rate of wage increase. Let i = the market interest rate
being employed as a discount rate. Let g = the projected rate of
wage growth. Then let r = the geometric net discount rate.
r = [(1+i)/(1+g) - 1], or (i - g)/(1+g).
Growth Rate. A growth rate is a percentage rate at which a
series of payments is projected to increase. It is conventional to
project growth rates in annual terms such that a growth rate for wages
of five percent would mean that wages would become five percent larger
each year. Growth rates might exist for costs in a life care plan,
wages, job-related fringe benefits, the Consumer Price Index (CPI) and
many other economic variables.
Hedonic Damages. The term “hedonic damages” usually refers to a measurement of an estimate of the dollar value of the loss of or a reduction in an individual’s “ability to enjoy life.” A calculation of hedonic damages usually begins with assuming a specific “whole value of life” from the “value of life” literature. That literature is based on a “willingness-to-pay” methodology that estimates the value of a “statistically anonymous human life” from the amount individual consumers pay to reduce safety risks just enough to prevent the loss of one human life. (Such values can also be derived from “wage-risk” studies based on the wage premiums workers are paid for taking more than the average risk of death in their employments.) After a specific value of life is assumed for a “whole life,” a subtraction is made for the lifetime earnings of an “average” person. The difference between the value of a “whole life” and the value of lifetime earnings of an average person is treated as the value of the average person’s ability to enjoy life. Finally, the annual value of life is used to create a present value of the loss for the life expectancy of the injured person or decedent. Some economists believe that such calculations are inappropriate, while others find them useful “benchmarks” for the losses of specific individuals. Expert testimony about such calculations are allowed in courts in some states, but not others.
Hedonic Technique in Econometric Theory. The term “hedonic” in economic theory does not refer to “hedonic damages,” but to a specific technique in econometric theory that is used for separating prices or wages into a set of sub-prices for specific characteristics of a good or a job. The technique was first used by Zvi Griliches and others to measure quality changes in automobiles from year to year. It was later used in the “value of life” literature to derive the values individuals placed on safety characteristics of a good or a job, from which safety values for human life could be derived.
Homemaker. A homemaker is the person in a family unit who has specialized in the development of her (or his) ability to produce the special goods and services produced within the household of the family. Normally, all family members, after reaching a minimum age, produce some household services in the form of performing some of the unskilled tasks required for maintaining a household such as cleaning, removing trash, and so forth. The non-homemaker adult member of the family may also supply some labor market skills in the form of repairs of home appliances or special investment abilities, but these skills are derivative from the individual’s labor market employment. The homemaker provides supervisory management for the family production process, takes primary responsibility in child rearing activities, and may play an important role in supporting her (his) spouse in the spouse’s labor market employment. A homemaker may be engaged only in homemaking, or also in full-time labor market employment in addition to homemaking responsibilities. If a homemaker has full-time employment in the labor market, the position she (he) has taken is often at an earnings rate below her earnings capacity, both in the short run and in the long run. In such cases, the usual tradeoff for acceptance of lower wages is greater ability to be responsive to special family needs, such as sick children, elderly parents and special tasks in support of the family’s primary wage earner spouse. See Gary Becker, A Treatise on the Family, Harvard University Press, Cambridge, Massachusetts, 1981.
Household Services. (See also Nonmarket Services.) Household services are non-market goods and services that are produced within households that have close analogs with goods and services produced within markets. Goods and services produced within families include both household good services and relational goods and services. The latter refer to special goods and services involving love, affection, consortium and special companionship. Household services refer to such activities as doing dishes, cleaning a house, child rearing activities, maintaining lawns, making repairs to household appliances and so forth.
Index Approach. An approach used by an economist to provide an indication of the time value of money with respect to a given category of loss. This approach is normally used when the economist does not feel confident of offering either a specific estimate of the value of the loss or even a benchmark value, which would be represented as “generally in the ball park.” An index might take the form of 10 hours per week of reduced ability to provide household services. Another example would be an index showing the present value for each $1000 dollars per year of reduced ability to provide household services. Still another example would be an index of present value for each $1000 per year of reduced ability to enjoy life. In such examples, the economist would not offer an opinion as to how many thousands of dollars per year had been lost, but would leave that determination to the trier of fact.
Inflation Risk. Inflation risk is the risk that the inflation rate will turn out to greater than the rate of inflation that was forecast, either explicitly or implicitly, in a projection of the stream of future payments. In an explicit projection, the stream of future values is projected at a specified rate of increase, which either is the rate of inflation or directly depends on the rate of inflation, as would be the case with wage growth. If the rate of inflation is greater than forecast, there will be a loss in purchasing power in the payments that will be made. In an implicit projection, a real discount rate or a net discount rate implies a relationship between the rate of inflation and the discount rate. If the rate of inflation increases more rapidly than the forecast of that relationship implies, there is a risk of loss in real purchasing power. Unlike default risk, however, inflation risk has both positive and negative sides. If the rate of inflation is forecast too high, either explicitly or implicitly, there will be gains in purchasing power in the stream of payments.
Intangible Losses. Laws of many states make a distinction between “intangible” and “pecuniary” losses. Intangible losses frequently include “loss of society,” “loss of the enjoyment of life” and “pain and suffering.” “Loss of society” is often broken down into companionship, guidance, counsel, consortium and other categories involved with emotional relationships within families. There are often restrictions on presentation of expert witnesses in the areas specified as “intangibles” that do not apply to areas specified as “pecuniary.”
Investment Approach (to parental loss in the death of a child). The investment approach for valuing parental loss in the death of a child is based on the Michigan Supreme Court case, Wycko v. Gnodtke, 361 Mich. 331, 105 N.W. 2d 118 (1960). This approach involves calculating the total value of the investment parents have made in a child, usually a minor child, until the date of the child’s death, or the actual past investment plus the future intended investment in the child until adulthood. This calculation is presented as evidence of the “economic” value of the child, compared with “intangible” values that might be involved with the love and affection of the parents for the child.
Job-Related Fringe Benefit. Any benefit provided by an employer that a worker receives in addition to money earnings as a part of labor compensation. Pension benefits, various types of insurance, recreational opportunities, provision of company automobiles and so forth are job-related fringe benefits. Some job-related fringe benefits are legally-mandated in the sense that employer payments for these benefits are mandated by law. Other job-related fringe benefits are discretionary in the sense that there is no legal requirement that they be provided. Note that some government agencies and some corporations report some money earnings as fringe benefits. Examples would be vacation pay and overtime premia. Care should be taken to avoid double counting of these benefits as both part of lost earnings and part of lost fringe benefits.
Labor Force. The labor force in the American economy consists of all persons who are currently employed in the labor market or who are actively seeking employment in the labor market. Most statistics about the labor force are collected and calculated by the Bureau of Labor Statistics, but some statistics are collected by the Bureau of the Census in its Current Population Survey conducted for the Bureau of Labor Statistics.
Labor Force Participation Rate. The labor force participation rate is the percent of the population currently participating in the labor force, which is defined as all persons currently employed in the labor market or actively seeking employment in the labor market. "Population" for purposes of measuring this rate is the number of persons in a given demographic category who are part of the "civilian noninstitutional population 16 years and over" in the United States. The labor force participation rate varies by age, education, race, and gender.
Law and Economics. Law and Economics is a subfield of economics that involves studying how legal institutions affect the allocation of resources within an economy. This area generally includes the economics of property rights, the economics of contracts, the economics of torts and the economics of crime, and is closely related to Organizational Economics, which deals with networks of contracts within organizations that produce goods and services, and Forensic Economics, which deals with the roles of economists in litigation and special aspects of economic measurement required by the litigative process. Many economists consider Ronald Coase, a recent Nobel prize winner in economics, to have founded this subfield as a major research agenda in economics during the 1950's and 1960's. Today, there are many centers for Law and Economics in major law schools throughout the United States.
Legally-Mandated Fringe Benefits. Legally mandated
fringe benefits are job-related fringe benefits that employers are
by law to provide for their workers. Employer payments into
Security, Workers’ Compensation, an Unemployment Insurance are examples.
Life With Periodic Certainty Guarantee Annuity. A “Life with a Periodic Certain Guarantee Annuity” provides payments for as long as the annuitant remains alive, but with the hybrid provision that payments are guaranteed to be made over a fixed period, even if the annuitant dies during that fixed period. If the annuitant died during the fixed period, the remaining portion of specified benefits for the specified period would be paid either periodically or in a lump sum to a surviving beneficiary.
Life Annuity/Straight Life. An annuity a stream of payments guaranteed to a given individual for as long as that individual remains alive. Many annuities are provided to an individual as a condition of employment or, as in the case of Medicare, as a condition of having reached the age of 65, including pensions and Social Security benefits. Individuals may also purchase annuities from insurance providers. Any annuity that is limited to payments based strictly on the survival of the owner of the annuity is called a “life annuity.” “Blended annuities” may add various special provisions such as that the payments will be guaranteed for a number of years, even if the individual dies, or that some part of the annuity payment amount will continued for the remainder of the life of a widowed spouse.
Life Care Costs. Life care costs include both medical and non-medical costs an individual will bear in the future because of a catastrophic personal injury. Such costs may include medications, medical treatments, rehabilitation training, special education, special housing requirements, special vehicle requirements, personal attendant care and similar types of expenses made necessary because of an injury.
Life Care Planning Expert. A life care planning expert is someone who has specialized knowledge in translating treatment recommendations of medical doctors for individuals with permanent injuries into the specific goods and services that would be required for those treatments. A life care planning expert also has knowledge about the special equipment and needs that will be required for specific types of disabilities that an individual may have suffered because of an injury. Normally, in a personal injury case, a life care planner will prepare a report of the medical and life care needs that are necessitated by an injury, both currently and in the future, and the current costs of those medical treatments and life care requirements.
Life Cycle. In the context of the work life of an individual, the term “life cycle” refers to a typical pattern that earnings increase most rapidly in an individual’s 20's, less rapidly, but still more rapidly than average, in an individual’s 30's, and slowing to below average in the 40's and 50's, perhaps even including declines in the 50's. This term is used synonymously with “age-earnings cycle” when used in the context of discussing an individual’s labor market activity.
Life Expectancy. The average number of years a person
would be expected to live from a given date in the past or today’s
Life Table. A “Life Table,” or “Mortality Table” is a table providing a listing of the number of individuals expected to remaining alive out of a birth base of 100,000 individuals. The table may be broken down by sex or race, to reflect cohorts, but it will, at a minimum, show the number of individuals surviving and dying at each year of age starting from age 0 and continuing to an advanced age, now usually age 100 or 120. [The tables may be “static” in the sense that they rely exclusively on past experience or “cohort” in the sense that they attempt to project the number of survivors likely to exist in the future.
Long-term Opportunity Cost Method. A method for evaluating the value of the economic contributions of a homemaker based on the probable earnings that person would have had if that person had participated in the labor market on a full-time career basis. This method contrasts with the current opportunity cost method, in that an individual homemaker who has been out of the labor market for a period of time may currently be able to earn only low wages, but could have been earning much higher wages if she had been continuously involved in the labor market.
Loss of Society. A term used to describe the loss of consortium, love and affection, and the intangible parts of companionship, guidance, counsel, and comfort, on the part of survivors of a decedent. Such losses can also be incurred by relatives of severely injured persons. It is a category of loss for which damages may be recovered in some jurisdictions.
LPE System. This technique can be used to estimate worklife expectancy of a worker by separately assessing the annual probabilities of survival of the worker (“L” for life), the annual probabilities that the worker would have been a participant in the labor market (“P” for participation), and the annual probabilities that the worker would have been employed (“E” for employment). These three probabilities can be multiplied together in any one year to determine the conditional probability that the worker would have been employed in that year. Adding these values over the life expectancy of the worker produces the LPE estimate of worklife expectancy. As this method is often used, annual conditional worklife probabilities are directly multiplied by earnings estimated over the individual’s entire possible life expectancy to age 100 (or to some advanced year such as age 75 or age 85). These annual loss figures over the life expectancy are then discounted to present value without any recourse to the worklife expectancy figure implicit in this method of calculation. Such an expected value technique is preferred by some economists and is referred to as an “actuarial approach.”
Macroeconomics. The subfield of economics that considers economy-wide relationships among general variables within an economy such as the interest rate, the inflation rate, the money supply, the rate of employment, the level of income, government spending, government taxation, consumption, saving, and investment.
Maintenance (as in Personal Consumption and Maintenance). In some states, there is a legal standard in Wrongful Death and Survival Action cases that only those types of consumption that are involved with narrowly “maintaining” a worker should be subtracted from a worker’s lost earnings and lost fringe benefits, rather than, as in most states, the total amounts of expenditures on personal consumption, net of family goods, that a worker would have been likely to have spent on himself. Where “maintenance” is used as the standard, it appears that the distinction is between minimum necessary expenditures required for a worker to provide his or her labor in the labor market, and discretionary expenditures by the worker on the worker’s own hobbies and interests, which could have been used to the benefit of other family members, but were not. In some states using a “maintenance” standard, legal conventions often develop for measuring maintenance that are not based on economic principles.
Marginal Tax Rate. In the federal tax system and many state tax systems, personal income taxes are “progressive” in the sense that as individuals move into higher income levels, they move into “tax brackets” with higher tax rates. In other words, all income is not taxed at the same rate. As an individual’s income increases, the percent of tax increases, but only on the additional income. The tax rate on additional income will therefore be higher than the average tax rate on the current level of income. When a worker loses income because of a personal injury, the rate of taxation on lost income is therefore likely to be higher than the average rate of taxation before the injury. Some economists therefore argue that income taxes should be calculated on a marginal tax rate basis rather than an average tax rate basis.
Market Rate of Interest. The term “market rate of interest” may refer to any of several currently existing rates of interest at which an individual could invest financial resources. In economic analysis, a market rate of interest is synonymous with a nominal interest rate and is distinguished from real interest rates and below market discount rates.
“Market Substitute” Good. Members of families produce a variety of goods and services within their households. All of these goods and services are non-market goods and services in the sense that they are not bought and sold in the commercial marketplace. Some of those goods and services are relational goods and services such as sentimental gifts, acts of love, consortium, companionship, special guidance and special counsel of an intimate nature. No close equivalents to these goods are bought and sold in the commercial marketplace. Other goods and services produced in households are are market substitute goods and services such as fixing meals, doing the laundry, repairing appliances and so forth, which are close substitutes for goods and services that can be purchased in the commercial marketplace.
Microeconomics. When distinguishing between
microeconomics and macroeconomics, the point is usually made that
macroeconomics is the economics of the whole economy, while
microeconomics is the analysis of the economic behavior of individuals,
families, and firms in narrowly defined markets for goods, services and
assets. In many ways, however, this is somewhat misleading in so
far as all parts of economic theory employ the basic tools of
microeconomic theory for developing analysis, while
macroeconomics is a specific subfield that deals with economy-wide
Some economists would argue that macroeconomics is really just a part
of microeconomics, which should be treated as synonymous with economics
Mortality Rate. The term “Mortality Rate,” or simply “Mortality,” refers to the percent of individuals who are projected to die as of future ages on a year by year basis. Thus, if an individual is 50 years of age, his mortality consists of the probabilities that he will die at age 51, 52 and so forth. The mortality rate at age 51 is also equal to one minus the survival rate for age 51.
Mortality Table. See Life Table
Net Discount Rate. The net discount rate (sometimes also called “net real interest rate”) is the geometric difference between the interest rate used as a discount rate and rate of increase in a worker’s wages. It differs from the real interest rate, which is the geometric difference between the discount rate and the rate of inflation, though in recent years the two rates have been quite similar. Some economists argue that the below market discount rate referred to in the Pfeifer and Culver II federal court cases is synonymous with the net discount rate, while others argue that the below market discount rate can refer to either the net discount rate of the real interest rate.
Nominal Interest Rate. Any currently quoted rate of interest that is not adjusted for future expected inflation is a nominal interest rate. This term is largely synonymous with market rate of interest.
Nominal Value. Values expressed in actual current dollar terms without adjustment for inflation are called nominal values. Future values in some loss projections are projections of the actual number of dollars needed in future years to replace losses that are being projected.
Non In-Home Services. Non In-home services is a term referring to market substitute goods and services that an individual might provide for a relative not living in the individual’s home. Making repairs on a parent’s home or taking a parent to the doctor or dentist would be examples.
Nonmarket Services. (See also Household Services and Non In-Home Services.) Nonmarket services are services such as cutting grass, washing dishes, preparing meals, providing guidance and counsel to family members, teaching minor children, preparing family budgets and other services for which market equivalents exist in the commercial marketplace. Such services may be provided within households or to adult children or parents who are separately domiciled.
Opportunity Cost Analysis. Opportunity cost analysis evaluates the value of something on the basis of the value of what was given up to acquire it. In a simple monetary purchase, the opportunity cost is the amount of money spent, but being a homemaker is achieved by giving up the earnings the homemaker could have earned in the labor market. In that sense, the earnings that were given up are the opportunity cost of being a homemaker.
Pain and Suffering. Pain and suffering is a term used for losses of either personally injured persons or decedents in the form of the physical pain or suffering caused by injuries. In some states, it has been argued that losses of the ability to enjoy life is a type of pain and suffering loss. Pain and suffering is a category of loss for which damages may be recovered in most jurisdictions.
Payroll Tax. A tax based on labor market earnings of an individual in comparison with an income tax that is based on earnings of all types. Individuals receive income from their labor activity and from interest, dividends, rents, profits and capital gains from sale of assets. A payroll tax does not tax forms of income other than labor related income. Some cities have payroll taxes instead of income taxes. Medicare, Railroad Retirement Tier I and Tier II and Social Security taxes are all payroll taxes.
Pecuniary Losses. States often make a distinction between
“intangible losses” and “pecuniary losses.” Intangible losses
often involve “love and affection,” “pain and suffering,” “enjoyment of
life,” consortium, companionship, guidance and counsel, while pecuniary
losses include earnings, fringe benefits and household production of
market substitute goods. The distinction is often premised on
what can be valued by basic financial analysis (pecuniary losses) and
what cannot (intangible losses).
Period of Loss. In any projection of economic damages, there is a period over which losses are projected to occur, either with certainty or with some probability of loss. A “certainty” period of loss would be a period of loss during which losses were projected with certainty to occur. However, the loss period could also be a period of time during which losses had some known probability of occurring, as in a life table in which annual mortality rates can be used to project possible losses through age 100 or age 110. In such a case, the period of loss would be the period from the date of an incident to age 100 or 110, depending on the life table. This is in spite of the fact that an individual’s life expectancy would be to a number of years substantially less than 100 or 110.
Personal Consumption and Maintenance (PCM). While sometimes defined restrictively in individual state law, this term generally refers to the amounts of money a decedent in a Wrongful Death litigation would have spent on himself or herself in a manner that would not have benefited the decedent’s survivors. The logic underlying this concept is that a part of an individual’s lost earnings would have been spent in a way that did not benefit survivors of the decedent. That amount should be subtracted to determine the losses of survivors.
Personal Injury. A personal injury is an injury that results in some type of ongoing pecuniary loss, but does not result in the death of the injured person.
Pre-Injury Career Track. In a Personal Injury analysis, the pre-injury career track is the labor market career an injured person would have been expected to have if the injury had not occurred.
Post-Injury Career Track. In a Personal Injury analysis, the post-injury career track is the labor market career an injured person is expected to have following an injury.
Pre-Judgement Interest. Pre-judgement interest is interest paid on losses between the date of a person’s loss and the date a judgement awards damages to replace those losses. Pre-judgement interest is sometimes expressly forbidden and sometimes specified by state law. Economic experts may or may not be asked to calculate pre-judgement interest.
Present Value. In financial theory, present value is a sum of money today which would exactly replace a stream of payments from the past or from the future, based on an assumed discount (interest) rate or set of rates. If the interest rate is presumed to be 10 percent, a sum of $1000 today will be worth $1100 at the end of one year (10 percent of $1000 is $100). In that sense, $1000 is the present value of $1100 one year from now. The actual process depends on the period over which compounding takes place, but $1000 today would be worth $1100 in one year and $1210 in two years. The extra $10 in the second year is $10 in interest on the interest from the first year. Thus, with annual compounding, $1000 is the present value of $1210 at the end of two years. In law, there is often a prohibition against pre-trial interest. As a result, what is called “present value” in litigation is often a combination of past actual value, but future present value. In the true financial sense of “present value,” interest must be added to past losses and subtracted from future losses.
Real Interest Rate. The real interest rate is the yield on a debt instrument net of expected rates of change in the purchasing power of payments scheduled in the debt instrument. For example, in a personal loan that is scheduled to be repaid in two years, the "nominal" interest would be the actual rate of interest being paid on the loan. The real interest rate would approximately equal the nominal interest rate minus the expected rate of inflation in the value of money during the two year period. The precise relation is given by solving the following equation for r
(1 + i) = (1 + r) x (1 + n)
r = (1 + i) / (1 + n) - 1
where i is the nominal interest rate, r the real interest rate, and n the rate of inflation. The precise relation differs from the approximate relation, r = i - n, in that it takes account of the effect of inflation on interest earnings as well as on the principal. The real interest rate is one of the two possible meanings of the "below market" discount rate discussed and encouraged in Pfeifer v. Jones & Laughlin Steel (op.cit.) and in Culver II (op.cit.).
Real Variable. In mathematics, a variable is a symbol that can represent any of a range of alternative values, and a real variable is a symbol that represents any of a range of real numbers (positive, negative, or zero). In economics, the term "real variable" is sometimes used to refer to a variable that is measured in money terms, but with the effects of changes in the price level eliminated. Normally, real variables are expressed in terms of the purchasing power of the dollar as of some specific point in time, as in "1995 dollars." In this phrase, all values for the variable for all years are measured in terms of a dollar with the same purchasing power that the dollar had in 1995.
Real Value. If the monetary value of an asset or a stream of payments changes over a period when there is inflation, part of the change is due to the effect of inflation. The "real value" reports the value in monetary terms but with the effects of changes in the price level eliminated. Normally, real value is expressed in terms of the purchasing power of the dollar as of some specific point in time, as in "1995 dollars." In this phrase, all values for the variable for all years are measured in terms of a dollar with the same purchasing power that the dollar had in 1995. In contrast, the "nominal value" reports the value in monetary terms with each year's value expressed in terms of the purchasing power of the dollar in that same year.
Rebuttal means to counter and disagree with opinions put forth by another witness. Rule 26(b) governing disclosure allows rebuttal witnesses thirty (30) days after the disclosure deadline for expert opinions to develop rebuttal opinions. The expert can determine why he disagrees with experts on the opposite side of the case, but may not develop new admissible opinions during that period.
Redact. To "redact" a document is to remove names, locations and other specifics that would allow the parties being discussed in the document to be identified.
Replacement Cost Analysis. All valuation in forensic economics takes the form of either “opportunity cost” or “replacement cost” analysis. Replacement cost analysis is focused on determining how much it would cost to replace a loss. Opportunity cost focuses on how much a worker was willing to give up to obtain what was lost. In efforts to value nonmarket services (or household services) of a decedent in a wrongful death action, a replacement cost analysis focuses on determining the cost of replacing the nonmarket services that had been being provided to survivors of the decedent before the death of the decedent.
Reversionary Trust. In a personal injury action, a trust may be set up with funding provided by the defendant to provide payments of a specific amount or for specific types of expenditures for as long as the plaintiff remains alive. When the plaintiff dies, any funds remaining in the trust revert to the defendant. Reversionary trusts may be used to provide for life care expenditures of badly injured plaintiffs.
Settlement Annuity. A settlement annuity is an annuity
contract that is unique because the periodic payments received from the
annuity contract are not subject to federal income taxes. Lump-sum
purchase premiums are to
be paid from settlements/awards of personal injury or wrongful death
actions that are covered, per se, under IRC 104(a)(2). In terms of the
contract language, a settlement annuity contract must comply with IRS
Revenue Ruling #79-220. That ruling allows the payee to exclude annuity
contract payments from reported income for tax purposes if the payee
was precluded from ever having control over the lump sum (premium) paid
for the annuity contract. This means that the payee never had and never
will have constructive receipt of the proceeds used to purchase the
annuity contract.. To meet that requirement, the settlement annuity is
owned by the defendant or some third party, usually a default-proof
assignee of the defendant.
Standard Risk. The term “Standard Risk” is applied to an individual if an insurance underwriter evaluates the survival and mortality rates of that individual as being typical of the cohort population included in the life table.
Statistical Worklife Tables. The Bureau of Labor Statistics developed a system for determining the statistically worklife expectancy of workers with various characteristics. These tables, particularly including tables in Worklife Estimates: Effects of Race and Education, Bulletin 2254 (February 1986), have been used by many economists to measure the expected worklife of individuals with different levels of education. More recently, several studies have been completed that update these Bureau of Labor Statistics tables, which are based on data from 1979 and 1980.
Subrogation. Various types of third party payers,
including Workman’s Compensation Programs, disability insurance
and third party payer plans sometimes have “subrogation
clauses” such that payments made to an injured worker must be
repaid if that worker wins damages for the same losses in tort
actions. Immediately following an injury, a worker may begin
receiving payments from a workman’s compensation program or from
a disability insurance program, with the understanding and legal
obligation that these payments must be repaid if the injured person
wins a tort settlement large enough to trigger the subrogation clause.
Substandard Risk. The term “Substandard Risk” is applied to an individual whose survival rates are evaluated by an insurance underwriter as lower than that of an average individual in a life table and whose mortality risks are therefore higher.
Survival Action. Survival actions are tort actions
in death cases in which the tort action “survives” the decedent in the
of a right of the estate, representing the decedent, to pursue legal
action the decedent could have pursued if still alive. Such
actions exist as alternatives to wrongful death actions in four of the
fifty American states and are paired with wrongful death statutes in
Survival Rate in an Actuarial Calculation. The term “Survival Rate,” or simply “survival,” refers to the percent of individuals surviving up to a given age divided by the number of individuals alive at some starting age from which the survival rate is calculated. Thus, for example, if the starting age for males is age 60 in the 1998 U.S. Life Table, the number of males out of 100,000 born who survived to age 60 was 84,188. The number of males in that group still alive at the start of age 65 was 77,547. Thus the survival rate for males age 60 expected to survive to age 65 would be 77,547/84,188 = 0.9211, or 92.11 percent.
Tort. A tort is an act of negligence by one private party toward another private party for which damages can be recovered. Not all harms are torts. If party A breaks a contract, damages may ensue, but the damages are from a contract violation, not a tort. Torts can be intentional, as in the O. J. Simpson case, but most torts are unintentional, meaning that the tort malfeasor did not intend to harm the tort victim. However, “tort feasor” and “tort malfeasor” mean essentially the same thing. “Feasor” means “maker,” while “mal” implies “bad.” Thus, tort feasor means “tort maker” and “tort malfeasor” means “tort badmaker.” Since all torts tend to be bad things, you will see both terms being used. What is meant by a “tort victim” is obvious. That is the party that has been harmed.)
Value of Life Studies. Value of life studies are studies of safety value that should be attached to human lives for purposes of public policy analysis. In cost-benefit analysis, some yardstick is needed to determine whether given expenditures on public safety are desirable and “value of life studies” were designed for this purpose. There are three types of value of life studies: contingent valuation studies, consumer safety-demand studies and wage risk studies. The second two types of “value of life” studies involve use of the hedonic technique for price disaggregation, while contingent valuation studies are based on survey information about consumer preferences. These studies are also relied upon by proponents of “hedonic damage” testimony, who infer proxy values for the enjoyment of life from these safety expenditure measures.
Vocational Expert. A vocational expert is a person who has normally had education and training in vocational counseling and who helps unemployed persons find suitable employment. Because of their education, training and direct involvement in job placement activities, vocational experts develop special expertise in the jobs that would be available to a particular injured worker and the current compensations that worker might be expected to earn. For that reason, vocational experts are often called upon in personal injury actions to make estimates of the earning capacity or expected earnings of workers who are forced to take new jobs because of an injury at issue in a tort action. Many vocational experts are vocational rehabilitation experts.
Wage-Risk Study. Wage-risk studies rely upon the hedonic technique in econometric theory, applied to the determination of fatality risk premiums for dangerous types of employment. This technique allows the wages of workers to be broken down into payments for time given up, payments for different education and skill levels, payments for the pleasantness of work, and payments for the risks of both injury and death involved with particular jobs. As used in the “value of life” literature, wage-risk studies focus on the wage premiums paid to workers for higher than normal fatality risks in their jobs, as determined by hedonic wage disaggregation techniques. A value of human life is determined by the aggregate premiums paid to workers for additional fatality risk, divided by the number of lives lost.
“Willingness to Pay” Study. The term “willingness to pay” refers to a special type of opportunity cost valuation analysis in which valuation proceeds from what an individual was “willing to pay” for a good, service or asset. The focus is on some sort of demonstration by individuals that they were “willing to pay” specific amounts for a specific good, service or asset, such that the value was worth the amount they individuals were willing to pay. Within the value of life literature, the meaning of “willingness to pay” is also broadened to include a “willingness to accept” wage premiums to compensate for higher than ordinary fatality risks in particular employments. In the “value of life” literature, the hedonic technique in econometric analysis is used to determine society’s willingness to pay for reductions in fatality risk (increases in the case of wage risk studies), which is then used to develop an estimate of the safety value that should be attached to preventing the loss of “statistically anonymous human lives.”
Work-Employment Expectancy. An individual’s work employment expectancy is the number of years of earnings an individual would be expected to have before death or final retirement from the labor market. Work-Employment Expectancy Tables can be compiled using the LPE system to measure the average number of years a worker would be expected to be alive, a participant in the labor market, and employed in a job. These tables are similar to worklife expectancy tables, but make a reduction for periods of unemployment that are not subtracted in worklife expectancy tables. For each possible year to age 100, the probability of life, the probability of participation and the probability of employment are multiplied by each other to obtain an work probability for that year. A sum work probabilities for all years to age 100 yields the Work Employment Expectancy for a worker.
Work Life. An individual’s “work life” is the number of years of activity in the commercial labor force either working at a job or actively seeking employment before final termination from the labor market through death or final retirement. The years in an individual’s work life do not have to be worked consecutively, such that two workers who both had forty-year work lives might take final retirement at different chronological ages.
Worklife Expectancy. Worklife expectancy is the average number of years of work life (either employed or actively seeking employment) that the individuals in a given cohort would be expected to have through their remaining possible lives (usually deemed to be to age 100, but sometimes age 110).
Wrongful Death Actions. Most states have wrongful death actions for torts which result in the death of an individual. In wrongful death actions, rights of recovery are normally limited to losses suffered by survivors of the decedent, as with a spouse and children who were receiving financial support from the decedent before the decedent’s death. Wrongful death actions are alternatives to, or are paired with survival actions, which allow the estate of a decedent to recover damages on behalf of the decedent.
Yield Curve. The “yield curve” refers to rates of
interest that are available at any one time for debt instruments of
increasing period to maturity. Normally, the yield curve is
rising, so that debt instruments with maturity dates further in the
future pay higher average
interest rates. Three month Treasury bills have lower rates,
with five-year Treasury notes, and rising still further with 20 and 30
year Treasury bonds. There are, however, special circumstances in
which the yield curve can become “inverted” for short periods of time,
that short term interest rates become higher than long term interest