Thursday, April 2, 2009

Workers' comp

The New York Times has a great article describing the problems that workers and employers face in New York's workers' compensation program.
...employers and employees are still at war over workplace injuries, a war marked by mistrust and fear. Each side is angry; each side has its own powerful evidence to justify that anger.

Workers say companies are going to extraordinary lengths to cut back on claims: contesting injuries, checking on workers at home, even firing those who file for benefits.

Employers say that the compensation system is so expensive, so riddled with fraudulent claims, that they need to take aggressive steps to curb their costs. A single injury can easily cost $10,000, and sometimes several hundred thousand dollars when a badly maimed worker draws benefits for life.
Many of the issues in the article stem from the well-known problem of asymmetric information. Workers know more about the state of their health and injuries than do their employers. Some work injuries, such as a severed digit or a broken bone, can be readily observed, but others, such as a hurt back or a repetitive motion injury, can't. Because the injuries can't be seen, workers have incentives in the form of workers' compensation benefits to misreport or overstate the severity of the injuries. In turn, employers create schemes to raise the costs of reporting a problem so that only those who are truly hurt will find it worthwhile to file a claim. The problem, of course, is that this imposes costs on people who have already been hurt.

An additional problem for employers is that lots of people--workers, doctors, judges--seem to view the compensation as a free good, not recognizing that the cost of the claims is paid by employers and, to some extent, employees.