Workers Compensation and Economic Cycles: A Longitudinal Approach

This paper uses cross-sectional time series techniques in an econometric framework to model workers compensation frequency, severity, and loss ratios over the course of the business cycle. Empirical evidence from 37 states over the 1979-1993 period strongly suggests that frequency is strongly pro-cyclical tending to increase during periods of economic expansion and fall during periods of economic decline or sluggishness. Similarly, the analyses reported in this study indicate that the economic determinants of indemnity and medical severity and loss ratios can be characterized by large pro-cyclical and small counter-cyclical components. The latter finding is contrary to conventionally held beliefs concerning this topic. At the time this study was performed, the authors were employed by the National Council on Compensation Insurance: Robert Hartwig as Senior Economist; Ronald Retterath as Senior Vice President and Chief Actuary; Tanya Restrepo as Economist; and William Kahley as Assistant Vice President for Economic Research.