Discrimination in Earnings Analyses

by Jamie T. Haven and Brian P. Brinig

Governor Newsom approved Senate Bill No. 41 adding §3361 to the California Civil Code on July 30, 2019. §3361 states: “Estimations, measures, or calculations of past, present, or future damages for lost earnings or impaired earning capacity resulting from personal injury or wrongful death shall not be reduced based on race, ethnicity, or gender.” The purpose of the bill was to stop the use of statistics that incorporate racial, ethnic and gender biases when calculating damage awards in civil litigation matters. The consequences of this well-intentioned law raise practical questions for the courts, lawyers and economic experts who rely on statistics to calculate losses.

Forensic economists regularly rely on statistical tables that report earnings, work life expectancies, life expectancies and other data to calculate the estimated losses of individuals in disputed matters. The economic expert typically compares the subject of the analysis to the most comparable peer group within a set of statistics to draw conclusions about the subject’s anticipated earnings (or other metrics). Many existing studies set forth observed data based on various demographic characteristics, including age, gender, education, race, and workforce participation. Some of these categories are immutable characteristics and others include immutable characteristics such as gender, race and ethnicity.

The policy of the new law is an understandable attempt to rectify past biases and discrimination. No one supports discrimination based on an immutable characteristic of an individual. However, the implications of not calculating an individual’s damages based on his or her actual life situation presents some illogical inequities when attempting to calculate “unreduced” damages.

The Lawyers’ Committee for Civil Rights Under Law published an article entitled How Race, Ethnicity, and Gender Impact Your Life’s Worth: Discrimination in Civil Damage Awards in 2018 which cited several instances of bias in damage awards in cases throughout the country. The Committee stated that gender- and race-specific earnings tables “Preserve systemic and structural inequalities, reinforce current pay gaps and workforce discrimination, and fail to account for possible progress.” The earnings tables referenced in the article are published by the United States Census Bureau and rely on information provided in the Bureau of Labor Statistics Current Population Survey. The Survey provides a variety of personal income tables that delineate income based on multiple variables, including but not limited to marital status, educational attainment, work experience and classification of worker.

One method of estimating an individual’s lost income is reliance on the Survey tables for personal income by educational attainment, which range from less than 9th grade through a doctorate degree. Data is provided for males, females and both sexes. For each gender category, there are tables for “all races,” “white,” “black,” “Asian,” “Hispanic” and other ethnicities. Compliance with the new law requires the forensic economist to decide which income table will not reduce damages as a result of race, ethnicity or gender. If use of the table fitting a plaintiff’s specific characteristics results in a lower dollar amount of damages, is the plaintiff being discriminated against?

Many personal income tables for females and minorities report lower income than similar tables for males and non-minorities. However, the calculation of “unreduced” damages is more complex than simply using data for white males. In the tables for income by educational attainment, there is not one ethnic group with data consistently higher than all the others, particularly as the level of educational attainment increases. “White alone, not Hispanic” males with a high school diploma working full-time, year-round, have higher mean earnings than all other equivalent

male categories at every age level reported. For males with bachelor’s degrees, however, there are age groups in which mean earnings for Asian males are highest. For males with master’s degrees, there are different age categories in which mean earnings for Asian males, all races and Black males are the highest. The inconsistencies in the data continue to persist in the median earnings tables as well. Does the new law require the calculation of “unreduced” damages from the highest dollar amount in each age category regardless of race? Or, should the economist select the one race category which would result in the highest lifetime earnings?

Economic experts do not always rely on the Survey tables when calculating lost income. When a plaintiff has an established work history, the historical earnings of the plaintiff are typically considered when estimating future lost earnings. According to the Lawyers’ Committee article, “large racial wage gaps persist for men of color: in 2015, African American men made 73% of white men’s earnings and Latino men earned only 69%.” The same type of gap in earnings exists when comparing the earnings of males and females. Could the argument then be made that plaintiff-specific historical earnings for minorities and females are already reduced due to their ethnicity and gender and need to be increased by some factor to adjust for this? If so, what data should be used to adjust these amounts to no longer reflect past discriminatory earnings practices?

Lost wages are not the only component of earnings in a damages calculation. The value of lost benefits is also included. These benefits can include health benefits, employer contributions to a 401(k) retirement plan and Social Security. One potentially significant benefit is the value of a fixed pension for those plaintiffs who are eligible as part of their employment. Examples of positions which offer such pensions are teachers, state workers and federal employees. In order to calculate the value of a pension plan, a forensic economist frequently considers the statistical life expectancy of the plaintiff. Unlike the earnings tables discussed previously, the life expectancy for a female at any particular age is always greater than the life expectancy for a male the same age. So, in this scenario, should female life expectancy statistics be used for both males and females in order to not reduce the pension loss calculation for gender?

An individual’s life expectancy also affects calculations of lost household services, assumed to continue to some degree to the end of the person’s life. These damages, while not “lost earnings or impaired earning capacity,” are still a component of economic loss in civil litigation matters, when applicable. If the loss of a future pension benefit for a male should be calculated to the statistical life expectancy for a female to remove any bias, should the loss of household services be calculated to the same life expectancy? What if, instead of or in addition to a loss of household services, the plaintiff has future medical care needs which need to be quantified through the remainder of his life?

Furthermore, economic experts do not typically limit their practices to only one legal venue, such as the California Superior Court system. They often provide analyses for cases throughout the country and in federal court. Should they use one methodology when calculating damages in a California civil matter and a different methodology in other states and federal court or should the desire to present “unreduced” damages result in the use of only one methodology regardless of the venue?

While the preceding examples do not represent the totality of choices that must be made when calculating damages in a civil litigation matter, they offer a sampling of the types of issues that must be addressed in order to no longer reduce damages based on race, ethnicity or gender. No one wants our judicial system to support discrimination, either directly or indirectly. The forensic economist is tasked with presenting an unbiased opinion of the plaintiff’s damages considering all relevant facts and making reasonable assumptions to form a conclusion. Does compliance with the new law require the economic expert to ignore the specific facts of a case and make all plaintiffs into the highest earning and longest living individuals? Calculations of damages should be based in reality while recognizing that in the past that reality has often been biased against women and minorities. Careful consideration should be given to the particular changes that need to be enacted to end this type of discrimination while still producing reasonable damage calculations which take all relevant facts into consideration. n

Jamie T. Haven and Brian P. Brinig are both forensic accountants and economists at CBIZ Brinig Taylor Zimmer in San Diego. They provide damages analyses in personal injury, wrongful death and wrongful termination matters. Learn more at www.cbiz.com.