By Dr. John F. Sase
Gerard J. Senick, chief editor
Julie G. Sase, copyeditor
William A. Gross, researcher
"A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it."
-German Physicist Max Planck (1858-1947), "Scientific Autobiography and Other Papers by Max Planck" (Philosophical Library/Open Road, 2014)
In this month's column, we will mix Humanistic Economics with Quantitative Analysis in order to explore the determination of Future Earning Loss that generally occurs in cases of Personal Injury, Wrongful Death, and Employment Law.
In August 2021, we introduced our readers to the field of Humanistic Economics. The nuances of Economics may befuddle even the brightest minds. However, by creating a hybrid of the Social Science of Economics with the various fields of Humanities, we may refer to the emerging product as Humanistic Economics-an approach to the puzzle of life, grounded in common sense and in the humane and empathetic treatment of our fellow beings. When economists bring their talents to the legal community, we bring more than a bag of numbers, equations, and charts to the table. We hope that we travel with and share a deeper understanding of human behavior. Mostly, we find Humanistic Economics in the narrative while the mathematics appears in the spreadsheets.
This month, we delve into the quantitative side of measuring future losses regarding cases entered into courts of law. The standard method for determining Future Value Reduced to Present Value is calculated by the presiding judge in a case. There may be an opportunity for a pre-trial settlement between both sides. If so, Forensic Economists named and retained by one or both sides take the pre-incident earnings for an individual and increase them annually for Cost-of-Living Inflation and possibly for an element-of-merit increase that grows the Future Values beyond the level of inflation. In cases going to pre-trial settlement, these economists generally supply a best estimate of what a judge would produce in these matters. If the case does not settle before trial, the judge takes on the task after judgement of reducing the losses as determined to their Present Value.
Having practiced as a Forensic Economist for 24 years along with writing, teaching, and other endeavors in the field of Economics, I (Dr. Sase) have had the opportunity to read, to review, and to study many methods and sources relevant to my forensic work. One of the most in-depth studies comes from the U.S. Bureau of the Census and is called the American Community Survey (ACS) (www.census.gov/acs/www/data/data-tables-and-tools/data-profiles/). Currently, the Bureau has published five-year data-profiles that filter into National, State, County, Place, and Metropolitan/Micropolitan Statistical Areas. The 2019 data-set, the most recent, is the first to include the Metropolitan/Micropolitan breakout.
Since then, I have been exploring this national data-set and have found a possible alternative to the somewhat archaic standard method of spreadsheet earnings-projection. However, this older tried-and-true method remains relatively easy to calculate, to explain, and to use in front of a judge and a jury. Nevertheless, the author of our opening quote, Dr. Plank, states in his autobiography that science advances new ideas, which we can calculate and graph using Excel on a laptop, thus giving us better models. Also, these innovative approaches may prove easier to comprehend on a humanistic level. (graph A)
Review of the Emerging Census Model
The Census Model in the ACS focuses on measuring and reporting Real Median Annual Earnings by Age and Educational Attainment. The age range measured and reported runs from 25 to 64 years. This range reflects the years in which most people get established in their respective lines of work through the age at which most employed people begin to leave the workforce (for one reason or another) before the Social Security Full Benefit Retirement Age (SSFBRA) of 67 or slightly less.
The study breaks the rank of Educational Attainment into nine groups. These groups begin with the lowest-earning group, those who have an eighth-grade education or less. The second group upward includes respondents who have advanced to the ninth-to-twelfth-grade level but who have not graduated from High School. The third tier encompasses those who either have formally graduated from High School or have earned a General Education Degree (GED).
Education beyond High School or its equivalency comprises the six post-secondary levels of attainment. We find that the first of these levels has become popular in recent years. The Certificate level involves approximately one year of post-secondary education in a specific, focused field of employment for those who wish to enter the skilled-labor force directly.
An Associate Degree at a Community College or a similar degree-granting institution comprises the next level of educational attainment. In these programs, students complete their general academic studies along with courses in a significant concentration. Given the certification of these programs, those who wish to attain a higher level of education can transfer their Associate credit to fulfill approximately half of the requirements for a four-year Bachelor's Degree program at a college or university.
Programs for the attainment of a Bachelor's or Master's Degree comprise the third level upward. These two-degree levels have been the general focus of higher education. From 2000 to 2018, the number of Bachelor's Degrees in the United States increased by 61%, from 29.8 million to 48.2 million. During this same time period, earned Master's Degrees have doubled, from 10.4 million to 21.0 million.
Bachelor's Degrees generally require a field of concentration and a smaller number of credits in an accompanying minor field of study. Master's-Degree programs generally require two years of additional higher-level courses in one general area of study.
The two remaining levels of attainment exist at the top of the earnings scale--Doctoral and Professional Degrees. Generally, the Doctorate identifies those with a Ph.D. in the arts and sciences such as English, Math, and Economics. Alternately, the Professional Degree includes those with degrees in Law, Medicine, and advanced areas of Engineering. The number earning Doctorates has more than doubled over the past two decades, rising from 2.0 million to 4.5 million. Meanwhile, the number of Professional Degrees only has grown by a fourth, from 2.6 million to 3.2 million.
Real Median Annual Earnings
Overall, the level of Educational Attainment reflects the rapidity of earnings advancement or, conversely, its stagnation. However, we need to consider Earning Levels and Growth in Real terms rather than in Nominal ones. The difference between these terms rests with Consumer Price Inflation (CPI). In the vast majority of years, Consumer Prices have increased, though not by the same amount or percentage each year. Real Income has filtered out the ever-changing CPI. This intellectual tool allows us to measure earning growth and levels more accurately in terms of clearly known variables of a person's age and his/her status of educational attainment. When the growth of wages and salaries do not keep up with the increasing cost of our homes, groceries, clothing, medical care, higher education, and other necessities, we find ourselves worse off. Eliminating Price Inflation from the data picture allows us to see just how much we have gained over the years. Taking changes in Price out of the concept will enable us to understand just how much we earn and how we acquire more knowledge, skills, and experience as we age.
Changing Levels of Earnings
Those who worked on the ACS at the Census Bureau collected data on age, education, and earnings over the years and corrected the income data by removing inflation. This alteration produces Real Earnings trend-lines for the nine levels identified over a 35-year work life. Also, the ACS analysts set a level-one baseline that passes through the three-and-a-half decades of real Income earned by those with only nine to twelve years of formal education. Only those with eight years of formal education or less consistently fell below the level-one baseline. Above this baseline, the Census Bureau established four more equidistant lines for earnings. The fifth level surpassed the Real Earnings of Professionals at all ages.
These benchmark lines allow us to track, to compare, and to contrast earnings for all nine groups over the years. Now for some personal Tech-Talk: I experimented with quadratic and cubic functions on the ACS data. Next, I applied them to data extracted from it. This exercise produced earning curves with at least a 95% goodness of fit. The Cubic Model had the best goodness of fit for the Master's level and the groups in the 8th grade and below. The Quadratic Model worked well for the remaining seven groups.
Individual Group Observations
In order to compile the figures for earnings over time, I measured the rise in Real Wages (waxing), the level-of-earnings peak, and the decline of these wages (waning) for all of the nine education levels of survey participants. (Graph B).
Professional Degree: Earnings waxed by 113% from 2.13 times baseline at ages 25-30 to 4.50 at ages 50-54. After a slight dip, there is a rise to 4.53 from ages 60-64. (Graph C).
Doctoral Degree: Earnings waxed by 83% from 2.13 times baseline at ages 25-30 to a high of 3.75 at ages 45-49 and continued to remain at that level until a peak of 3.89 at ages 60-64. (Graph D).
Master's Degree: Earnings waxed by 63% from 1.88 times baseline at age 25 to a high of 3.06 at ages 45-49 before waning by 8% until a level of 2.81 at ages 60-64. (Graph E).
Bachelor's Degree: Earnings waxed by 58% from 1.63 times baseline at age 25 to a high of 2.57 at ages 45-49 before waning by 8% until a level of 2.38 at ages 60-64. (Graph F).
Associate Degree: Earnings waxed by 44% from 1.34 times baseline at age 25 to a high of 1.93 at ages 50-54 before waning by 5% until a level of 1.84 at ages 60-64. (Graph G).
Certificates: Earnings waxed by 41% from 1.22 times baseline at age 25 to a high of 1.72 holding at ages 45-54 before waning by 1% until a level of 1.70 at ages 60-64. (Graph H).
High-School Grad/GED: Earnings waxed by 32% from 1.09 times baseline at age 25 to a high of 1.44 holding at ages 45-54 before waning by 6% until a level of 1.36 at ages 60-64. (Graph I).
9th to 12th Grades: Earnings waxed by 27% from .94 times baseline at age 25 to a high of 1.19 at ages 45-49 before waning by 2% until a level of 1.17 at ages 60-64. (Graph J).
None to 8th Grade: Earnings waxed by 15% from .81 times baseline at age 25 to a high of .93 at ages 40-59 before waning by 2% until a level of .91 at ages 60-64.
(Continued) ...
