How Forensic Economists Calculate Economic Damages

Economic damages are calculated by subtracting what the person earns or can still earn from what the person would have earned but for the injury, death or termination, adding the lost fringe benefits, and then adding up the past years and discounting the future years to present value. A forensic economist makes that comparison one year at a time, and a valuation date, such as the trial date, divides the past years from the future ones. Lost household services and the cost of future care are added where the claim includes them, and in a death case the decedent's own consumption is deducted.

Economic damages are the losses that can be measured in money from records and published data: earnings and benefits, the unpaid work a household loses, and the cost of care. Non-economic damages, such as pain and suffering, are not part of this calculation.

Forensic economists are retained to quantify the economic consequences of injury, death, wrongful termination, or other legally actionable events, and the forensic economics article describes the discipline. The economist is one of three disciplines that fill the role of economic damages expert, with the vocational expert and the life care planner, and a matter may need one, two or all three. Kincaid Wolstein Vocational and Rehabilitation Services (KWVRS) provides forensic economic analysis with its affiliated firm, Kincaid Wolstein Economics, for plaintiff and defense counsel, and the calculation follows the same steps and data whichever side retains it.

The core of a lost earnings calculation is a comparison between two scenarios: the "but for" scenario, what the person would have earned had the event not happened, and the "with injury" or "as is" scenario, what the person has earned since and can still earn. The second path is not the economist's to set. It comes from actual earnings since the event, from the vocational expert's opinion of the earning capacity that remains when the ability to work is in dispute, or it is zero when the person cannot work at all; the economist prices that opinion rather than forming it, and the earning capacity guide explains how lost earnings and lost earning capacity differ.

In wrongful death cases, the analysis projects the decedent's earnings over a projected working life, net of a personal consumption deduction, values the household services the decedent would have provided over a horizon tied to life expectancy rather than worklife, and discounts the years after the valuation date to present value. The deduction removes the share of income the decedent would have spent on the decedent's own needs, which the survivors would never have received; economists estimate it from consumer spending data, and it depends mainly on the size and income of the household (U.S. Bureau of Labor Statistics, n.d.; Patton & Nelson, 1991). No such deduction is made for an injured person, who still bears those living costs.

The "but for" projection answers three questions. What was the person earning before the event, and was that pay on track to grow faster or slower than the occupation's average? How have wages and salaries grown in the person's occupational group and industry, as the Bureau of Labor Statistics' Employment Cost Index records that growth (U.S. Bureau of Labor Statistics, n.d.)? And how long would the person have kept working?

Worklife expectancy answers the last question. It is the number of years a person of a given age, sex, education and labor force status is statistically expected to spend in the labor force, and unlike a fixed retirement age it allows for time spent out of the labor force. The tables most often cited are those of Skoog, Ciecka and Krueger (Skoog et al., 2011); other researchers publish competing estimates, so the report names the table and the edition it uses, and the worklife expectancy guide explains where two reports most often differ on it.

Fringe benefits are the compensation an employer provides beyond pay: health and other insurance, retirement contributions such as 401(k) matches and pension contributions, and the employer's share of Social Security and Medicare taxes. The Bureau of Labor Statistics measures them in its Employer Costs for Employee Compensation series, as a cost for each hour worked and as a percent of total compensation (U.S. Bureau of Labor Statistics, n.d.).

In June 2026, employer costs for civilian workers averaged $49.46 for each hour worked: $33.85 in wages and salaries and $15.61, or 31.6 percent of compensation, in benefits (U.S. Bureau of Labor Statistics, 2026). The series counts paid leave ($3.71) and supplemental pay such as overtime and nonproduction bonuses ($1.73) as benefits, but a person's annual earnings records already include that pay, so a projection built on those records draws its addition from the other three categories: insurance ($4.23), retirement and savings ($2.53) and legally required benefits ($3.41, of which Social Security and Medicare are $2.80 and unemployment insurance and workers' compensation the rest). Set against pay that includes paid leave and supplemental pay ($39.29), those three come to about 26 percent when each is added in full, and to about 24 percent when the legally required share is Social Security and Medicare alone. The report states which categories it adds and whether the figures come from the employer's own records or from the series.

Only future losses are discounted because the award pays them now, years before they would have been earned, and a lump sum can be invested in the meantime; losses before the valuation date have already happened, so they are added up as they occurred. The valuation date, such as the trial date, is where the loss is split. The portion from the event to that date is added up year by year from the records and the earnings the person would have had, without discounting; whether interest is added to it is a question for the governing law, which counsel confirms. The portion after that date is projected over the remaining worklife, or over life expectancy for household services and care costs, and the report shows the two portions on separate lines.

Present value discounting is the final step for the future portion. The award is paid once, as a lump sum, so each future year's loss is reduced at a discount rate, the rate at which the lump sum is assumed to be invested. Because the losses are also projected to grow, what decides the result is the net discount rate, roughly the discount rate less the growth rate applied to the losses. Economists commonly draw the discount rate from the yields on U.S. Treasury securities, which are treated as free of default risk (U.S. Department of the Treasury, n.d.). Total offset methods instead presume that the discount rate is offset by growth the projected earnings would otherwise carry, so neither that growth nor the discount is applied; as Jones & Laughlin Steel Corp. v. Pfeifer (1983) describes these methods, each counts the effect of price inflation on wages toward the offset, and they differ over what other growth, if any, counts.

The governing law can decide how the discount rate and inflation are handled, including whether the total offset method applies, and whether the figures are stated before or after income taxes. Where it does, the input is set by law rather than by the economist. In Jones & Laughlin Steel Corp. v. Pfeifer (1983), a federal maritime injury case, the Supreme Court tied the discount rate to "the best and safest investments," declined to make any one method of accounting for inflation the exclusive method in federal courts, and declined to hold that the total offset approach is mandatory there. Pennsylvania's Supreme Court took its own total offset approach in Kaczkowski v. Bolubasz (1980). As Pfeifer describes the decision, the party claiming the loss may introduce evidence of future wage growth from individual and societal sources other than price inflation, and the projection that results is not discounted at a real interest rate; instead, the market interest rate is deemed to be offset by future price inflation.

Taxes are the other question the law answers. Pfeifer reasoned that because the award itself is tax-free, the lost stream is ideally one of after-tax wages and benefits, discounted at an after-tax rate of return. Counsel confirms the forum's approach to the discount rate and to taxes before the report is final, and the report states whether its figures are before or after income taxes.

A hypothetical injury case shows how the steps combine; the figures are illustrative and come from no actual matter. A worker earned $60,000 a year before the injury, and the vocational expert finds a remaining earning capacity of $35,000 a year, so the earnings gap is $25,000. If both jobs carry benefits worth 20 percent of pay, the yearly loss is $30,000. Two years pass between the injury and the valuation date, so the past loss, held at that level for simplicity, is $60,000, and it is not discounted.

The future loss runs over a remaining worklife of 20 years, or $600,000 before discounting. Stated at today's pay and counted at the end of each year, its present value is about $541,400 at a net discount rate of 1 percent and about $490,500 at 2 percent; at a net discount rate of zero it stays at $600,000. With the past loss added, the total runs from about $550,500 to $660,000, so the choice of rate alone moves it by more than $100,000, which is why the report shows the result at each rate it considers and gives the source of every input. The damages estimator runs the same past and future steps on counsel's own inputs at a planning level.

A reviewing economist, whichever side retains one, first tries to reproduce the total from the inputs the report states; a figure that cannot be rebuilt from its own pages is the first problem to raise. Each input is then tested in turn. The earnings base is built into every projected year, so the review asks whether it is tied to the tax returns and pay records or to a single unusual year, high or low. The horizon question is which worklife table and edition the report used, and whether it applied the figure as a fixed end date or as a probability for each year. The growth and discount rates are read as a pair, since an error in the gap between them, in either direction, compounds over a long projection. The offsets and benefits follow: the with-injury earnings, which a report can set too high or too low, the personal consumption share in a death case, and any benefit counted twice or left out. The last check is whether the report says if its figures are before or after income taxes, and whether that matches the forum's rule.