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Estimating non-discriminatory lifetime earnings for young females

by Christopher Bruce and Kelly Rathje

This article first appeared in the spring 2006 issue of the Expert Witness.

A number of judicial decisions have suggested that estimates of the lifetime earnings of young females should be based on data for males. Two arguments have been made in support of this view.

The first argument is that, as the differential between male and female earnings has been falling, incorporating the historical differential will understate the future earnings that young females will achieve once they become established in their careers. The second argument is that it is inappropriate for the courts to institutionalise current wage differentials that are based on discrimination.

The first of these arguments was alluded to in two BC judgments: ([B.I.Z.] v. Sams, [1997] B.C.J. No. 793; and Terracciano v. Etheridge and Fujii, [1997] B.C.S.C. B943125). The latter judgement involved a woman who was aged 16 when injuries from an automobile incident left her a paraplegic. In this judgement, Madam Justice Saunders indicated her preference for using earnings statistics of males to calculate Ms. Terracciano’s without-incident income:

[81] Indeed, it may be as inappropriately discriminatory to discount an award solely on statistics framed on gender as it would be to discount an award on considerations of race or ethnic origin. I am doubtful of the propriety, today, of this Court basing an award of damages on a class characteristic such as gender, instead of individual characteristics or considerations related to behaviour: Toneguzzo-Norvell (Guardian ad litem of) v. Burnaby Hospital, [1994] 1 S.C.R. 114.

The second argument was considered explicitly in the Alberta decision, MacCabe v. Westlock (RCSSD #110 et al [action: 9303 05787]). There, for example, the court accepted the use of income statistics for males to estimate the without-incident potential earnings of a young woman who had been paralysed while still a high school student. The court found that Ms. MacCabe had a without-accident income potential that was well above average. Importantly, the court argued:

[para468] Clearly the evidence establishes that the exceptional individual characteristics of the Plaintiff are such that her abilities would have commanded the equivalent salary of her male counterparts. She would have established a strong attachment to her career. The use of male wage tables is justified. In any event, I am of the view that any award which I grant to the Plaintiff should not and cannot be solely determined by her gender.

[para469] It is entirely inappropriate that any assessment I make continues to reflect historic wage inequities. I cannot agree more with Chief Justice McEachern . . . in Tucker, supra, that the courts must ensure as much as possible that the appropriate weight be given to societal trends in the labour market in order that the future loss of income properly reflects future circumstances. Where I differ is that I will not sanction the "reality" of pay inequity. The societal trend is and must embrace pay equity given our fundamental right to equality which is entrenched in the constitution. . . .

However, these decisions were silent about the possibility that women might earn less than men even after discriminatory practices had been removed. Importantly, for example, the Court of Appeal in MacCabe (9803-0617AC) rejected the trial court’s finding that male contingencies (such as for non-participation, unemployment, and so forth) should be used when estimating Ms. MacCabe’s losses.

[105] In general, tort law and in particular, the quantification of damages necessitates an individual approach. This is where I find the learned trial judge erred. In attempting to rectify potential inequities in the methods for quantifying damages, the learned trial judge neglected to focus on the evidence and the individual actually before her. While principles of equality should inform tort law, the learned trial judge’s application of equitable principles resulted in her ignoring some of the relevant material facts.

[106] In this case, based on the evidence, it was not reasonable to calculate MacCabe’s damages based on male contingencies. MacCabe stated she wanted to have children and would have preferred to stay at home with them for some period. This meant she would not have worked a pattern typical for male physiotherapists. There was no evidence to indicate it was more likely that MacCabe would not have had children and chosen not to take time off from full time paid employment as a physiotherapist. Thus, it would be inappropriate to apply male contingencies to her when there was no evidentiary basis that she would have worked a typical male pattern.

The appellate court in MacCabe recognised that, even in a world in which men and women experienced equality of opportunity, incomes might differ between the sexes if they made different choices. Most importantly, women might choose to take more time off to care for children; might choose to work fewer hours per week or weeks per year; and might retire earlier than men.

If this is true, one approach to predicting the earnings of young women might be to take current earnings data for men and adjust them downward for these differences in contingencies. In this article, we consider the impacts that each of four such contingencies might have on the male/female earnings differential.

Participation rates

The percentage of any group that is either working or available for work at any time is known as the "participation rate." Primarily because of the impact of child-rearing, women have lower participation rates than do men at virtually every age. Hence, if everything else is equal, women’s earnings in an average year will be lower than men’s in proportion to the differences in participation rates.

Statistics indicate that the best predictor of whether a particular woman will be in the labour force in the future is whether she was in the labour force in the past. In particular, married women who had been working prior to the birth of their first child have a strong tendency to return to work within one to two years of the birth of that child. Nonetheless, there is a large number of women who delay re-entry until their youngest child is of school age. [1]

Also, many authors have detected a strong positive correlation between education level and female participation. That is, the most highly educated women tend to have the strongest attachment to the labour force. Table 1, for example, indicates that 86.4 percent of 25-54 year-old, university-educated women in Alberta participated in the labour force in 2002, compared with 80.7 percent of 25-54 year-olds who had high school education. (Participation rates drop significantly after age 54 due to retirement.)

Table 1

Note that the figures reported in Table 1 reflect the current labour force participation of women. It seems likely, however, that women who are currently in their 20s and 30s will maintain their high participation rates as they age. Therefore, the figures for the older age categories, in Table 1, might be adjusted upwards when projecting the future behaviour of plaintiffs who have not yet reached the age of majority.

Given the figures in Table 1, and recognising that male participation rates are approximately 95 percent for all age and education groups (between 24 and 54), the earnings for females might be estimated by reducing male earnings by the difference between 95 percent and the relevant female labour force participation rate. For example, given the information in Table 1, the earnings for females with post-secondary education could be estimated by reducing the earnings of comparable males by approximately 10 percent. Similarly, earnings for those with high school education might be obtained by reducing male earnings by approximately 15 percent.

Part-time employment

Even when they are in the labour force, women report lower annual incomes than men because they are more likely to work part-time. As Table 2 indicates, in the age group 25-54, approximately 20 to 25 percent of women work part-time, whereas only 2 to 5 percent of men do so. That is, on average, the number of women working part-time is approximately 20 percentage points higher than the number of men. If part-time is interpreted to mean "half time," this implies that women in the labour force work 10 percent fewer hours than men. Everything else being equal, therefore, this difference suggests that male earnings should be reduced by a further 10 percent, in order to obtain an estimate of female earnings.

Table 2

Hours Worked

There is also evidence to suggest that, even among individuals who work "full-time," women work fewer hours per week than do men. Table 3 indicates, for example, that women’s "usual hours per week" are about 80 percent of those of men. Furthermore, Sweetman [2] reports that this ratio varies only slightly by education level: in the age group 40-44, for example, the ratio of female to male hours worked is 81 percent for those with high school and 85 percent for those with a bachelor’s degree.

Table 3

It would be double-counting, however, to reduce male earnings by both 10 percent for part-time work and 15 to 20 percent for hours worked, as the latter differential includes the effect of the former. Rather, it appears that, among those individuals who work full time, women work 5 to 10 percent fewer hours than do men. It is this contingency that should be applied to male earnings.

Retirement

It is seen in Table 4 that women retire approximately two years earlier than men, on average. Hence, any estimate of female lifetime earnings will have to take this difference into account.

Table 4

Summary

Even if there was no discrimination in the labour market – that is, even if women received the same hourly wages as men – on average, women’s annual earnings would still be lower than men’s. Among those with high school education, the differential would be as much as 35 percentage points, due to differences in labour force participation rates (15%), propensity to work part-time (10%), and hours worked per week (10%). Among university graduates, the differential would be approximately 25 percentage points.

Accordingly, if it is concluded that women’s attachment to the labour market will not change in the future, women’s average annual earnings cannot be expected to rise above 65 percent (high school graduates) to 75 percent (bachelor’s degrees) of men’s earnings.

Only if women increase the percentage of their time that they devote to the labour market will that 25 to 35 percent differential begin to fall.

Application

How should these statistics be applied? We believe that two broad cases can be distinguished. In the first, the plaintiff was old enough at the time of her injury that it is possible to determine both the occupation she would have entered and the strength of her attachment to the labour market. (This was the situation in MacCabe, for example.) In those cases, information specific to the plaintiff should be used to predict her (non-injury) earning capacity.

In the second case, the plaintiff was young enough that neither her career nor her labour market attachment can be predicted. In such cases, we believe that information about the plaintiff’s family background is sufficient to allow the court to identify approximately what her educational attainment would have been. Census data concerning incomes by education can then be used to predict the plaintiff’s earning capacity.

But, is it census data for females, or for males, that should be used for this purpose? We have argued that, if the court believes either that labour force discrimination will largely disappear over the next few decades, or that the effects of discrimination should not be institutionalised in damage awards, it is male data that should form the basis of the award. However, the information we have presented in this paper suggest that, even in the absence of discrimination, women will earn less than men because of differences in attachment to the labour force. For that reason, we would propose that, for young females, the forecast of earnings capacity should be based on male data; but that those data should be adjusted downwards as we discussed above.

Footnotes

1. C.J. Bruce, Assessment of Personal Injury Damages (Butterworths: Toronto, Vancouver), fourth edition, 2004, page 167. [back to text of article]

2. Arthur Sweetman, 2002. "Working Smarter: Education and Productivity," The Review of Economic Performance and Social Progress, in: Andrew Sharpe, Executive Director & France St-Hilaire, Vice-President, Research & Keith Banting, Di (ed.), The Review of Economic Performance and Social Progress 2002: Towards a Social Understanding of Productivity, volume 2 Centre for the Study of Living Standards. [back to text of article]

leaf

Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary. He is also the author of Assessment of Personal Injury Damages (Butterworths, 2004).

Kelly Rathje is a consultant with Economica and has a Master of Arts degree (in economics) from the University of Calgary.

Overview

This article examines the sources of male/female earnings differentials that might arise from differences between the sexes in labour force participation rates, part-time hours, and retirement ages. It concludes that, even in the absence of labour market discrimination, women may earn 25 to 35 percent less than men.

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