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The Valuation of Household Services – Conceptual Issues

by Therese Brown

This article first appeared in the winter 1996 issue of the Expert Witness.

Since individuals make valid contributions through their efforts at both paid and unpaid work, the courts have concluded that they should be compensated when they are unable to pursue either type of employment. In the field of personal injury litigation this has implied that calculation of a plaintiff's damages should include the loss (or impairment) of the individual's ability to perform household services. Controversy remains, however, concerning the method which should be used to establish the economic value of that loss.

Three frequently discussed household services valuation methods will be explored here: the opportunity cost method, and both the generalist and specialist variants of the market replacement method. Each of these wage-based methods will be defined and the advantages and disadvantages associated with each of them will be outlined. It will be argued that there are sound reasons for the courts to have frequently adopted the generalist variant of the market replacement approach in personal injury cases.

The Opportunity Cost Method

Valuation of household services utilizing the opportunity cost method is based on the assumption that when an individual chooses to undertake unpaid work, such as household activities, the possibility of spending that time at paid work is precluded. Thus, the salary associated with that employment is foregone. Wages sacrificed to allow the individual to spend time at unpaid work are thus said to be representative of the economic value that the individual places on the unpaid activity. For example, if the individual has chosen to give up 20 hours a week of employment paying $10 per hour, in order to engage in 20 hours of housework, the opportunity cost approach concludes that the value of that housework must have been at least $10 per hour. Ten dollars becomes the valuation of an hour of housework.

There are various problems associated with adopting the opportunity cost method to valuate household services, not the least of which is the determination of the wage that has been sacrificed to allow the individual to participate in unpaid work. Janet Yale has delineated some of these concerns in her article, "The Valuation of Household Services in Wrongful Death Actions" (University of Toronto Law Journal, 1984, 303). She notes that it is reasonably simple to estimate the foregone market wage in the case of an individual who has had recent labour market experience, who has clearly defined skills, or who belongs to a particular profession. Outside of this framework, the estimation of an appropriate market wage may become extremely difficult.

More problematic is the assumption, underlying the opportunity cost method, that the amount which must be spent to restore the plaintiff to his/her pre-accident position is the value which the plaintiff had placed on the household services which have been lost. Although the individual may have given up $20 per hour to engage in housework, that individual can, in principle, be compensated for his/her loss by employing a third person to perform the forgone tasks. If a maid service can be hired to wash the kitchen floor for $15, it does not matter whether the plaintiff had previously foregone $6 or $60 to wash that floor – it will be equally clean in either case. (The exception to this argument occurs when the plaintiff had formerly obtained pleasure from household chores – but the compensation of this loss is properly that of non-pecuniary damages.)

The Replacement Cost Methods

The approach taken in both replacement cost methods is to value household services according to what it would cost to hire an individual who offers those services on the market. The difference between the two market substitute methods is that the generalist method assumes that these services could be replicated by an individual who does general domestic work. The specialist method, on the other hand, assumes that to replace household services it would be necessary to hire individuals with expertise in specific areas that comprise the various components of household duties.

Jamie Cassels expresses two concerns about the use of the replacement cost method in an article entitled "Damages for Lost Earning Capacity: Women and Children Last!" (The Canadian Bar Review, 1992, 488). First, he notes that homemaking is more all-encompassing than is implied when described simply as housekeeping, and as such the services of a housekeeper cannot adequately replace the contributions made by someone who is running a household. He also argues that domestic wages are depressed due to the large volume of "volunteer and vulnerable" labour provided by women in this sector. This would imply that these services have a higher value than the relevant market wages would indicate.

Selection Among Methods

The concerns identified above are representative of the various criticisms leveled at wage-based methods. For the most part these concerns are valid and in principle imply that these methods are inferior to the ultimate tool in the assessment of household services which has been identified as one that valuates the outputs of unpaid work (Households' Unpaid Work: Measurement and Valuation, Statistics Canada Publication 13-603E, No. 3, 28). Elimination of this method, on the basis of its impracticality, leaves the choice between wage-based methods and more subjective methods of valuation. Since the latter would unquestionably lead to inconsistent results, we come back to wage-based methods. Although not flawless, these prevail as the best techniques available, in any practical sense, to facilitate the calculation of loss of household services.

Once the field is narrowed to these methods, it is necessary to identify the criteria that the method of choice must satisfy. Janet Fast and Brenda Munro have outlined several criteria which serve this purpose in their article "Toward Eliminating Gender Bias" (Alberta Law Review, 1994, 12-13). In particular they note three issues which warrant consideration when choosing an appropriate method: first, its computational complexity; second, the extent to which it achieves distributional equity; and third, how well it satisfies the objective of restoring the plaintiff (as much as is possible) to his/her pre-accident position. On this basis, Fast and Munro recommend the use of replacement cost methods in the valuation of household services in personal injury claims, as they best meet these criteria.

Of the two replacement cost methods, it may well be that the specialist variant is unmanageable in a practical sense, in addition to being less than objective. This approach necessitates a lapse into subjectivity when a particular specialist in one of various occupational fields has to be matched to certain household tasks (Households' Unpaid Work: Measurement and Valuation, Statistics Canada Publication 13-603E, No.3, 25). Another hurdle remains after the occupational field is identified, as various factors affect the wage payable to specialists, depending on whether they are self-employed or employees, full or part-time employees, supervisors or labourers in entry-level positions, etc. Prior to calculation of the average wage an assumption must be made as to the "type" of employee under consideration. It is apparent that the determination of the wage for a specialist is not a clearcut matter.

If the specialist variant is ruled out, for practical reasons, this leaves the generalist variant of the market replacement method as the technique of choice in the valuation of the loss of household services. One concern that remains in reference to this method is that individuals who work in the domestic sector may perform household tasks more efficiently than would individuals in their own homes. Allowance is made for this increased efficiency in Economica's calculation of the loss of household services. To reflect this efficiency differential, the estimation of hours of household services which have been lost is reduced by 25 percent, giving an approximation of the number of replacement hours required (see "Adjusting Claims for Hours Devoted to Household Chores", in the Summer 1996 Expert Witness).

In our view, the generalist variant of the replacement method, once adjusted in this way, is the tool which lends itself best to the calculation of the loss of household services in personal injury cases. It is only when the generalist approach is clearly inappropriate, such as when the plaintiff provided services to the household which could only be replaced by a skilled tradesperson, that we would recommend use of the specialist method.

The caveat still holds, however, that an estimate derived using the replacement cost method is only as reliable as the factors used in its calculation, specifically the determination of the number of hours requiring replacement and the hourly cost of the replacement services. Both of these topics will be discussed in future issues of The Expert Witness, as will a review of court judgments dealing with the loss of household services.

leaf

From 1996 through February 1998, Therese Brown was a consultant at Economica.

Overview

In this article Therese Brown explores various complexities arising from the determination of the loss of household services in personal injury or fatal accident actions. While it is pointed out that information specific to the individual is preferable, average statistics are frequently relied on as well.

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