Determining economic damages from wrongful termination

Statistical information can empower the jury in a wrongful termination case

2015 June

The economic damages resulting from wrongful termination are substantial. An individual may become displaced from the labor market during a critical point in his or her career development. Even if an individual quickly finds re-employment following wrongful termination, the individual may have suffered economic damages if the earnings level pre-displacement is not quickly recaptured. There are two components to calculating the economic losses in wrongful termination litigation:

1. The likely compensation that the individual would have earned absent the wrongful termination.

2. The likely compensation that the individual can be expected to earn from alternate employment consequent to the wrongful termination.

The economic loss in a wrongful termination case is equivalent to the sum of:

1. The difference between the two compensation streams, and

2. The foregone earnings growth.

The calculation of this loss can be based upon the plaintiff’s actual post-separation employment and earnings or on the statistically average employment and earnings the plaintiff could have received post-separation. This article provides both statistical information from the Displaced Workers Survey and a potential approach an economic expert may take in determining the economic damages resulting from wrongful termination.¹

Economic overview of job displacement

One important characteristic of a labor market is its fluid nature. As a result of this fluid nature, however, many workers become displaced from their jobs due to a plant closing, a layoff, or the abolition of a job. These individuals are often structurally unemployed. This unemployment is generally the result from a mismatch between the skills needed for available jobs and the skills possessed by those seeking work. Second, structural unemployment may occur because of a geographical mismatch between the locations of job openings and job seekers. Some displaced workers experience a period of unemployment simply as a result of job search, and others are structurally unemployed and in need of retraining or further education.

Economic theory suggests some insights about structural unemployment. In the first place, higher levels of general education are associated with lower levels of structural unemployment. For instance, college graduates who are displaced from their employment because of changes in demand or technology have a wider range of job options and usually find retraining to be easier than persons who have little formal education. When the economy is at full employment and rapidly expanding, firms experiencing shortages of skilled workers often find it profitable to hire individuals who do not possess the required job skills but who can be trained while on the job. But when a recession occurs and the overall rate of unemployment rises, firms hiring new or replacement workers can draw skilled workers from the large unemployment pool. Workers who do not possess the required job skills will stay unemployed longer, and structural unemployment will rise.

There exists a large economic literature concerning earnings losses and time to re-employment for displaced workers. The consensus in this literature is that displacement leads to sustained earnings losses. Multiple papers written in the 1990s utilized the Displaced Workers Survey (DWS) data and found earnings losses ranging from 8 percent to 16 percent when the displaced worker is re-employed within a three year period.^2,3,4 This early research has shown that a portion of returns to tenure with a prior employer is rewarded when workers are reemployed in the same industrial sector.⁵ Furthermore, displaced workers who switch industries following displacement have systematically larger earnings losses.⁶ In a more comprehensive study, Farber (2005) examined the experiences of displaced workers from 1984 to 2004 utilizing the DWS.⁷ He found that in the most recent period he examined, about 35 percent of job losers are not employed at the subsequent survey date, and that full-time job losers who find new full-time jobs earn about 13 percent less on average on their new jobs than on the lost job.

Kletzer & Fairlie (2003) utilize data from the National Longitudinal Survey of Youth (NLSY) in order to examine the experiences of younger displaced workers and find that the long-term earnings losses of younger displaced workers are similar to those with greater labor market experience.⁸

This article focuses on the insights that can be gained from the most recent editions of the DWS and how those insights can be applied in a litigation setting. Several worker characteristics play a role in the duration and magnitude of post-displacement economic loss: age, gender, education, tenure at pre-displacement job, and the length of unemployment following displacement. In order to examine these characteristics, statistics are presented in this article based on age, gender, and level of educational attainment for the change in earnings, the time to employment, and the unemployment rate following displacement. The other characteristics can be discussed theoretically.

The Displaced Workers Survey

The U.S. Bureau of Labor Statistics conducts, as a supplement to the Current Population Survey, the Displaced Workers Survey (DWS) biennially.⁹ This survey provides a magnitude of information about the post-separation experiences of displaced workers. Perhaps the two most important pieces of information are the range of the length of job search and the earnings recapture rates in subsequent employment. It collects information from workers displaced within three years of the survey date on items such as: gender, age at survey date, educational attainment, employer tenure, reason for displacement, industry information regarding the pre-displacement position, whether the individual found work subsequent to the displacement, the duration of unemployment, and earnings information regarding both the position from which the individual was displaced and any positions the individual has held subsequent to the displacement.

The DWS asks only about a single involuntary job loss. The survey neither examines multiple job losses by the same worker nor does it consider workers terminated “for cause.” The DWS captures worker terminations as a result of plant closings, layoffs, and the abolition of jobs primarily. Furthermore, the DWS asks about job separation within the previous three years from the survey date. The data is not longitudinal, and thus, only two time periods are available (pre-displacement three years prior to survey date and post-displacement as of survey date).

I analyze data on 284,121 individuals between the ages of twenty-five and sixty-four from the Displaced Workers Surveys conducted as part of the January CPS in 2008, 2010, 2012, and 2014. Job losers are defined as those workers who reported a job loss in the three calendar years prior to the survey date. Of this number, 15,222 (or roughly 6 percent) are defined as being displaced workers. I count as displaced workers those job losers who report that their reason for job loss is “plant or company closed down or moved,” “plant or company operating but lost or left job because of insufficient work,” and “position or shift abolished.” Also, my analysis is restricted to the experiences of workers who were employed full time prior to displacement.

In order to investigate the loss in earnings due to displacement, I adjust all earnings figures to 2014 dollars. The change in earnings between the lost job and the job held at the DWS survey date is calculated, in real dollars. This forms the basis for the average earnings change statistics. I report these statistics by level of educational attainment, gender, and age grouping. Had the displaced worker not lost his or her job, earnings likely would have grown over the interval between the date of job loss and the DWS survey date. This effect remains unexplored in my analysis in this article for the sake of simplicity. As a result, the earnings changes are most likely greater in magnitude (more negative) due to this effect.

Furthermore, I explore the time to employment between job displacement and the beginning of a new full-time job. Lastly, the percentage of individuals that still remain unemployed or are not participating in the labor market as of the survey date (three years from job displacement) is reported.

The economic damages from job displacement

In aggregate, earnings are found to be 8.7 percent less for those displaced that find subsequent employment during the three-year survey period. The average individual that found subsequent employment took 15.4 weeks to find a new job. About 23 percent of job losers are not employed at the subsequent survey date. However, there are substantial differences from these aggregate averages that the statistics in Tables 1-12 reveal.

Table 1 displays the statistical results for male displaced workers between the ages of 25 and 64 across various levels of educational attainment. Males with less than a high school education experience the greatest decline in earnings post-displacement and nearly one-third find themselves unemployed at the time of the survey following a displacement.

We concentrate our attention on younger male workers (ages 25-34) that have been displaced in Table 2. These younger male workers do not experience as large of an earnings decline as their older counterparts in Tables 3-5. These individuals have short job tenures and have not invested in a long-term career in a single firm. While these workers do not display a large decline in earnings following job displacement, they still suffer substantial losses as a result of losing the accelerated earnings growth that comes with establishing a career.

Tables 3 and 4 display statistics for displaced male workers aged 35-44 and 45-54, respectively. These individuals are in the prime of their career. Individuals aged 45-54 experience substantial losses from displacement. Higher educated and higher qualified workers seem to be employed first following displacement as the unemployment rates drop by education except at the most advanced levels. Individuals with a professional/doctorate degree may find it challenging to find a comparable job due to their specialized skills and training. This could help explain the relatively high level of unemployment for 45-54-year-old males (20.4 percent).

Older male workers (aged 55-64) tend to experience the most relative economic damages due to job displacement. They typically experience a larger earnings decline, a greater time to reemployment, and a higher unemployment rate. Table 5 displays these results.

In Tables 6-10 statistics for women are presented in the same fashion as those for males in Tables 1-5.¹⁰ The results for women provide a lot of the same conclusions of those available for men.

Lastly, Tables 11 and 12 consider male and female workers that have reported a disability. As is apparent from the tables, individuals with a disability fare far worse than the statistical averages in their respective groupings. Displaced workers with a disability experience a greater earnings decline, have a longer time to reemployment, and suffer a substantially increased unemployment rate.

Applying the statistics

An expert may find this information concerning displaced workers of use in authoring a report or in offering testimony in cases of wrongful termination. In wrongful termination cases, the economist must analyze the back pay (as a result of unemployment and/or a change in level of pay), front pay (the differential between pre-termination and post-termination earnings considering the duration for the recovery of pre-termination earnings, if ever), and the loss of benefits (health, pension, stock options, etc.).

A starting point in analyzing back pay is examining the difference between potential earnings and actual earnings. An economist may also consult statistical information (such as the Displaced Workers Survey) regarding duration of unemployment and relative pay levels upon finding a new position. For example, if the plaintiff in a wrongful termination case decided to attend a two-year college after a fairly short period of unsuccessful job search, an analyst could provide an estimate of how long a person with a similar background could have expected to find new employment. The 2008-2014 Displaced Workers Survey results show that a typical person is out of work 10 to 24 weeks after displacement from their job. Variables affecting that average include age, education, gender, and disability status. For example, females between age 25 and 34 with a baccalaureate degree have a mean of 11.1 weeks out of work after displacement. Female workers between age 45 and 54 with a baccalaureate degree are typically displaced considerably longer, with a mean of 17.4 weeks. Also, persons with 12 or fewer years of education tend to be displaced longer than those with higher levels of education.

In addition to applying statistics from the DWS to an individual who has been wrongfully terminated, the expert must review previous work history, the state of the local labor market, and circumstances surrounding the termination of employment.

Next, the expert must analyze front pay. Important considerations include previous level of pay, age, transferable skills, education, and the state of the local and national economy. Workers who were earning a relatively low wage typically will have little front pay damages. These levels of pay are usually associated with unskilled work or entry-level positions. Plaintiffs who had been performing unskilled work will have developed few skills specific to the firm they worked for. Many entry-level positions will also have few firm-specific skills, since these workers generally have little tenure with their employer. Plaintiffs that have developed valuable firm-specific skills will generally have greater front pay damages, since their skills are less transferable.

Level of educational attainment is another important variable. For example, a high percentage of displaced workers with a bachelor’s degree or higher can be expected to recover comparable compensation after they generated new firm-specific capital in their new employment. It is not unreasonable for this to take anywhere from 2 to 10 years. However, this is without adjusting for inflation or earnings growth during that time period. When this is taken into consideration, the time period for recovery is extended. It is also important to note that a wrongfully terminated individual’s earnings may never recover to the level of pre-termination earnings due to an impaired reputation. In cases like these, it is advisable to present to the jury a range of scenarios to consider. In addition, workers over the age of 45 typically have a harder time securing a level of compensation similar to what they had before displacement.

An economist should use statistical research on displaced workers as a guideline. Data collected on displaced workers are at the national level. However, the local economy may be relatively stronger or weaker than the national economy (at the time the data was collected). An economist can take into consideration the impact of local unemployment rates on front pay when developing their opinion.

The loss of pension and retirement benefits must often be considered as well. Pensions are typically calculated based on years of seniority and final average pay (over the last few years of employment). Thus, loss of employment may have a compound impact, especially on workers nearing full retirement qualifications. Health insurance, employer matching of 401(k) plans, and stock options are among many other benefits that may need quantification. The difference in the value of benefits is often an important “hidden” factor in determining the magnitude of the loss.

Conclusion

This analysis has provided statistics from the most recent editions of the Displaced Workers Survey. Importantly, this information is helpful in empowering the jury in a wrongful termination case by presenting the experiences of the typical displaced worker. The use of these statistics should be combined with professional judgment and an understanding of the unique characteristics of each individual worker.