How Forensic Economists Calculate Economic Damages

Forensic economists are retained to quantify the economic consequences of injury, death, wrongful termination, or other legally actionable events (what a forensic economist is). Their work is structured around a relatively standard analytical framework, though the application of that framework requires numerous methodological choices that can significantly affect the final damages figure. Understanding how that framework operates - and where the most significant levers are - helps counsel evaluate damages reports and prepare for deposition and trial.

The core structure of a lost earnings calculation is a comparison between two scenarios: the "but for" scenario (what the plaintiff would have earned absent the harmful event) and the "with injury" or "as is" scenario (what the plaintiff will earn given their current condition). The difference between these two projected streams of income, discounted to present value, is the economic loss. In wrongful death cases, the analysis projects the decedent's earnings and household services contributions over a projected working life, applies a personal consumption deduction, and discounts the net contribution to present value.

The "but for" earnings projection requires assumptions about several variables. What was the plaintiff's earnings trajectory before the injury? Were they on track for wage growth above or below their occupational average? What is the Bureau of Labor Statistics' projected wage growth for their occupation and industry (U.S. Bureau of Labor Statistics, n.d.)? How long would the plaintiff have continued working? Worklife expectancy data - published by academic researchers using Census Bureau and BLS data - provides the statistical foundation for this last question. The most widely cited worklife expectancy tables are the Skoog, Ciecka, and Krueger worklife expectancy tables (Skoog et al., 2011), though other researchers have published competing estimates that are also used in practice.

Fringe benefits are a component of compensation that forensic economists add to base wages because they represent real economic value the employer provides in addition to salary. Employer-paid health insurance, retirement contributions (401(k) matches, pension contributions), and the employer's share of payroll taxes (Social Security and Medicare) are the primary components. The Bureau of Labor Statistics' Employer Costs for Employee Compensation survey provides data on fringe benefits as a percentage of wages across industries and occupations (U.S. Bureau of Labor Statistics, n.d.).

Present value discounting is the final step in the calculation. Because the damages award is paid today as a lump sum, but the losses extend over future years, the future losses must be discounted to reflect the time value of money - the principle that a dollar today is worth more than a dollar in the future because today's dollar can be invested. The discount rate is the assumed rate at which the lump sum could be invested. The selection of an appropriate discount rate is one of the most actively debated methodological questions in forensic economics. Common approaches include the use of U.S. Treasury yields (representing a risk-free rate; U.S. Department of the Treasury, n.d.), corporate bond yields, or the "offset" method in which wage growth and discount rates are assumed to be equal, eliminating the need for explicit discounting.