Robert Hall Ph.D., CRC, CDMS
Revised June, 2007
This article will describe a method for determining “Diminished Earning
Capacity”. I have named this method “SEDEC”, which stands for Stepwise
Estimate of Diminished Earning Capacity. Although there are a variety of civil and administrative legal settings within which the SEDEC method might be utilized, this article will specifically focus on use within the California Workers’
Compensation Permanent Disability Rating System (PDRS). The SEDEC methodology and rational is explained below. Sample application of the SEDEC method is also provided.
Note: the methodology described in this article is not intended as a comprehensive legal or regulatory interpretation of SB 899’s intent regarding the PDRS. However, as efforts are made to create an accepted procedure for the determination of “diminished earning capacity” in the PDRS, the author believes
“SEDEC” offers a reasonable option, combining an objective, empirically-based method with needed simplicity and administrative efficiency.
As a result of SB 899, Labor Code section 4660 has been fundamentally changed. The governing language in LC 4660(b) now requires that the PD rating process for each case take into account the potential for “diminished earning capacity”. The only currently available information concerning how that is to be
accomplished is in the statutory language itself.
LC 4660(b) states:
“A numeric formula based on empirical data and findings
that aggregate average percentage of long-term loss of income
resulting from each type of injury for similarly situated employees”.
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Key concepts from this section are as follows:
; Numeric Formula;
; Empirical data;
; Aggregate average percentage of long-term loss of income;
; Resulting from each type of injury for similarly situated employees.
Because of the immense variation that exists on individual claims, application of
these simple concepts necessarily involves extraordinary complexity. Each of
these critical concepts needs further exploration.
SEDEC is an attempt to capture the underlying process and provide a numeric formula. No such formula currently exists. Creating such a formula is feasible, but must include the key variables that adequately address the impact of “disability” on an individual’s employment potential and earning
capacity. Focusing simply on prior occupation, as previously done in the “Schedule” is incomplete and inadequate. Other factors, i.e. level of education, geographic location, language skills, etc. contribute just as much, if not more, to the prediction of future earning capacity.
Empirical data exists that can be used to support such a process. Sources include:
; vocational evaluation and functional capacity evaluation processes,
using standardized tests;
; medical information, including health professional estimates of work
; standardized occupational information systems & software - Dictionary
of Occupation Titles (1992) & O*NET (2005) based systems;
; labor market data (State and Federal labor market estimates, industry-
based surveys, job listing services);
; wage data (State & Federal wage surveys, industry surveys & private
Long Term Loss of Income
This concept implies that loss of income cannot be viewed just in the short-term, but needs to be evaluated over the longer term. In civil litigation, a loss of earnings is calculated over the “statistical worklife” of the individual.
Worklife adjustments are commonly made by experts to reflect the variability that can reasonably result with regard to education, age, gender, and disability. It is reasonable that “statistical worklife” be included in any
calculation of income lost as empirical data exist that address this factor. Bringing “statistical worklife” into this equation also allows for needed
flexibility and adaptability in the estimate around several issues. These issues include:
; time out of the workforce for vocational rehabilitation;
3 The SEDEC Method – June, 2006
; limitation to part-time work;
; difficulty finding a job as a function of pre or post-injury work disability;
; difficulty keeping a job as a function of pre or post-injury work
; future medical treatment, i.e. surgery, etc.;
; a progressive medical condition that becomes more disabling with
Lastly, an estimate of remaining “statistical worklife” meets the statutory need
to express “long-term loss of income” as a percentage. The SEDEC formula
described below includes worklife as an optional additional factor.
Resulting From Each Type of Injury for Similarly Situated Employees –
of all the concepts included in the statutory language, this is the most
obscure. Rating each type of medical impairment is difficult enough due to the
many types of impairments. The need to allow for multiple or combinations of
impairments adds immense additional complexity. Anyone familiar with the
Federal Workers’ Employees Compensation (FECA) or Longshore & Harbor
Workers (L & H) programs can testify to this.
The phrase “similarly situated employees” gives little clue as to what or how
which was to be considered in the “numeric formula”. Theoretically, a matrix
could be created to address “long-term loss of income” with regard to all
occupation groups and all medical impairments, but no data exists to develop
such a matrix. Even if it did, excluding from such a matrix other critical
individual factors such as education, skills, interest/motivation, and labor
market would make it close to useless for purposes of predicting “loss of
The A.M.A. Guides
LC 4660 also states that the injury / illness shall be described utilizing the A.M.A. thGuides, 5 Edition. As discussed in the Guides, they cannot be used to make
direct estimates of “work disability”, but are intended for more general use as an
estimate of “whole person impairment” and an “individual’s overall ability to perform activities of daily living”. The Guides do describe a process for
determining functional limitations or “work restrictions”, i.e. what a worker can
and cannot do and how activity might aggravate the medical condition.
ndThe A.M.A. Guides and the A.M.A.’s Disability Evaluation, 2 Edition identify the
larger issues surrounding determination of “disability” and “earning capacity”.
These factors are listed as follows:
; an individual’s age, education, acquired skills, knowledge, and work
; an individual’s motivation and adaptation to change;
; work requirements;
; work environment;
; state of the job market;
4 The SEDEC Method – June, 2006
; local economic conditions;
; past earnings and future potential earnings.
Role of the Vocational Rehabilitationist
The role of the Vocational Rehabilitationist (VR) is accurately characterized in the above A.M.A. publications as “bridging the gap” between “work limitations” and “disability” as reflected in diminished earning capacity. In order to form expert
opinions regarding diminished earning capacity, a Vocational Rehabilitationist must sequentially evaluate an individual in terms of what they can offer a potential employer. Thus, the basis for an opinion regarding diminished earning capacity must be built upon a foundation of “Employability”.
The A.M.A. Guides defines Employability as follows:
“The capacity of an individual to meet the demands of a job and the
conditions of employment associated with that job as defined by an employer,
with or without accommodation” (p. 318).
The A.M.A. definition of Employability speaks to a specific match between a
given worker and a job within a specific work environment. For purposes of evaluating future Employability and impact on “long-term loss of income” within
an administrative proceeding, a broader definition of “Employability” is called for.
Determination of Employability should result in a list or “pool” of occupations that
best represent a workers employment potential. Depending upon the individual, this employment potential might be best represented by 1-2 jobs (persons with many years of experience & skill development in a single or well-defined occupational area e.g. teacher, journeyman welder, police officer, etc.) or a larger group of occupations with similar demands and potential (administrative assistant, clerk, manual laborer, etc.).
For these purposes, I propose the following alternative definition of “Employability”:
Employability: “The collective employment strengths & limitations that an
individual has by virtue of their innate abilities, education, work capacities,
skills, and knowledge”.
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Functional Work ExperienceEducationCapacities
FCE or Physician
In addition to Employability, the VR must consider how an individual’s
Employability interacts with realities of the labor market and workplace. The A.M.A. Guides calls this consortium of factors the “Place Ability” of the
individual. This refers to the process of an individual taking their employment potential, their “Employability”, and applying it in a real labor market.
For purposes of this analysis “Place Ability” is defined as follows:
Place Ability – the ability of the individual to obtain a job and retain a job,
given the realities of the current and future job market (supply & demand,
growth rates, turnover), the “competitiveness” of the job applicant, i.e. the
ranking of an applicant against their fellow applicants, (more or less
experience, skills, etc.), and the “Employer-Employee Fit”, i.e. how the job
applicant matches up with the employer environment, and the need for and
availability of job accommodations”.
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Employer -EmployeeGrowth ratesFit
TurnoverNeed for Accommodations
Thus, it is proposed that the role of the Vocational Rehabilitationist in the PDRS should be to help to “bridge the gap” between impairment and work disability by providing an individualized analysis of employability, place ability, and earning capacity over the worker’s remaining worklife.
The SEDEC Method described below focuses on these sequential steps.
7 The SEDEC Method – June, 2006
The SEDEC Method
The SEDEC method is proposed to facilitate development of empirically-derived
Vocational Rehabilitation expert opinion and evidence that is useful within the
PDRS. The basic steps of the SEDEC method and formula are described below.
Stepwise Estimate of Diminished Earning Capacity (SEDEC)
1. Determine average past earnings & convert to hourly rate; 2. Determine single job and/or pool of jobs that most reasonably offer
greatest employment potential to worker;
3. Calculate median entry-level hourly wage for job or pool of jobs;
4. Calculate median experienced wage (with 3-5 years experience) for a
single job or a pool of jobs;
5. Determine pre-injury worklife or pre-injury work period to be considered; 6. Consider potential loss due to reduced worklife;
7. Calculate loss scenarios using SEDEC formula;
8. Develop alternative scenarios to consider the impact of receiving
Vocational Rehabilitation, job accommodations, training, etc.
； Pre-injury hourly wage rate (A)
； Post-injury entry-level hourly wage rate (B1)
； Post-injury experienced hourly wage rate (B2)
； Entry-level hourly earnings difference (C)
； Experienced hourly earnings difference (D)
； Percentage earnings loss during entry-wage period (C1)
； Percentage loss during experienced wage period (D1)
； Pre-injury years of worklife or # years in work period considered (WL1) ； Entry level earnings period (typically 3-5 years) (P1)
； Entry level earnings period, expressed as percentage of worklife (P2) ； Experienced earnings period (P3)
； Experienced earnings period, expressed as percentage of worklife (P4) ； Percentage earnings loss during entry wage period (AC1)
； Percentage earnings loss during experienced wage period (AC2) ； Percentage loss of earnings capacity (AC3)
iiiOptional Adjustment for Reduced Worklife due to Disability ,
； Post-injury years of worklife or work period, adjusted for disability (WL2) ； Post-injury worklife, adjusted for disability, expressed as a percentage
； Percentage loss of earnings capacity, adjusted for reduced worklife
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The SEDEC Formula:
Diminished Earning Capacity
1. A - B1 = C ? A = C1
2. A - B2 = D ? A = D1
3. P1 ? WL1 = P2
4. WL1 – P1 = P3
5. P3 ? WL1 = P4
6. C1 x P2 = AC1
7. D1 x P4 = AC2
8. AC1 + AC2 = AC3
Adjustment for Reduced Worklife due to Disability
9. (WL1 - WL2) ? WL1 = WL3
10. AC3 + WL3 = AC4
9 The SEDEC Method – June, 2006
； 40 y.o. male Carpenter, with less than a HS education, had pre-injury earnings of
； Entry-level post-injury earnings are projected @ $10/hour (B1)
； Entry-level earnings difference is $10/hour (C)
； Percentage earnings loss during entry-level work period is 50% (C1)
； After 5 years, experienced earnings are projected @ $14/hour (B2)
； Percentage earnings loss during experienced work period is 30% (D1)
($20 -14 = $6/hour, a 30% loss) (A - B2 = D ? A = D1)
； Pre-injury worklife or work period considered is estimated @ 25 years (WL1)
； Percentage of WL1 subject to entry wages is 20% (P2)
(entry-level wage period is 5 years, which is 20% of 25 years) (WL1)
； Percentage of WL1 subject to experienced wages is 80% (P4)
Note: experienced wage period is 20 years, which is 80% x 25 years
(80% x 25 years = 20 years)
； Percentage earnings loss during entry wage period is 10% (AC1)
(50% (C1) x 20% (P2) = 10%
； Percentage earnings loss during experienced wage period is 24% (AC2)
(30% (D1) x 80% (P4) = 24%
； Estimated % of diminished capacity over remaining worklife is 34% (AC3)
(10% (AC1) + 24% (AC2) = 34% (AC3)) (AC1 + AC2 = AC3)
Estimated Diminished Earning Capacity over Normal Worklife is 34%
Optional Adjustment for Reduced Worklife due to Disability
； Post-injury worklife or work period, adjusted for disability, is estimated at 20 years
； For this example, this means there is a 100% loss of earnings for 5 years out of total
work life of 25 years.
； Expressed as a percentage, loss of worklife due to disability is 20% (WL3)
(25 – 20 = 5 ? 25 = 20%) (WL1 - WL2) ? WL1 = WL3
Estimated Diminished Earning Capacity, Adjusted for Reduced Worklife, is 54%
(34% + 20% = 54%). (AC3 + WL3 = AC4)
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i； Standardized BLS worklife data based upon age, gender, race & level of
？ Millimet, Nieswiodomy, Ryu, Slottje (2002) Estimating Worklife Expectancy: An
Econometric Approach. Department of Economics, Southern Methodist
University: Dallas, Texas;
？ Ciecka, Donley, Goldman. Work Life Estimates at Millennium's End: Changes
over the Last Eighteen Years. Illinois Labor Market Review: (Vol. 6, No.2
？ Smith, S. Revised worklife tables reflect 1979-80 experience. Monthly Labor
Review: August, 1985.
ii； Data re: labor force participation rates that take disability into account
？ Steinmetz, Erica, J. (2002). Americans with Disabilities: 2002. U.S. Census
？ McNeil, J. (2000). Employment, Earnings, and Disability. U.S. Bureau of the
？ Trupin, Sebasta, Yelin, LaPlante (1997). Trends in Labor Force Participation
Among Persons with Disabilities, 1983-1994. Disability Statistics Rehabilitation
Research & Training Center, University of California, San Francisco.
？ The New Worklife Expectancy Tables (2002) Vocational Econometrics.
About the Author:
Robert Hall, Ph.D.
Certified Rehabilitation Counselor
Certified Disability Management Specialist
Fax (619) 463-9337
Dr. Robert Hall has practiced as a Vocational Rehabilitation consultant in California since 1980. He has served as Director of the Work & Health Technologies Center at San Diego State University and as Adjunct Professor in SDSU’s graduate Rehabilitation Counseling Program since 1993. Dr. Hall has conducted extensive research and training activities in disability, rehabilitation, and return-to-work programs. Dr. Hall has consulted with and provided training to a variety of health and human service organizations in the areas of rehabilitation program development & evaluation. He has consulted with several large employers and insurance organizations regarding proactive compliance programs with the employment provisions of the FEHA and ADA. Dr. Hall has developed SEER software, an occupational information and analysis system that utilizes the O*NET database. Dr. Hall is also a principal in Presagia Corporation, an employee health and productivity management software and consulting company based in Montreal, Canada.