By: Dr. Stanley Stephenson
As Originally published in Valuation Strategies, May/June 2006, pp. 2-7.
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The forensic financial expert may be familiar with assessing lost profits, earnings capacity, or even valuing a business, but what is the expert to do about damages arising from lost ability to engage in non-market work? In a personal injury, wrongful death or similar tort cases, physical limitations may restrict market and non-market work the latter forming the basis for an additional source of damages. The issue can also arise in divorce cases. If engaged by plaintiff counsel and the facts of the case suggest lost non-market work, the expert needs to know how to prepare such an assessment. If retained by defense counsel as an expert or consultant, one should be able to develop an independent assessment of household production damages and/or critique the opposing counsels' expert's methods and results. The point is lost household production value can be a significant part of compensatory damages; if done improperly, it opens the door to challenging the expert's testimony via tough cross-examination questions.
The goal of this paper is to provide a framework to enable the consulting financial expert to understand the steps involved in estimating household production value. There are six key steps:
Before presenting a discussion of each step, however, we offer a valuation perspective and a quick overview of three competing methodologies that have been suggested for valuing household production value.
The productive use of time may arise in both labor market and non-market settings. In the labor market, the individual exchanges skilled services for a "rent" called compensation. In a non-market setting, we can divide time into leisure and non-market work. Nonmarket work includes activities you would be willing to pay someone else to do for you, i.e. grocery shopping, lawn mowing, etc. All other non-market activities, such as sleeping, bathing, eating, etc., we refer to as "leisure". All activities then fall into three categories: market work, non-market work, and leisure.
Prior articles and books which discuss household production valuation issues refer to three approaches: the replacement cost, sometimes called the specialist cost method; the market or opportunity cost method; and, the housekeeper method. In the replacement cost approach, the valuation expert asks "What is the cost of hiring individuals to do each activity performed in household work such as food shopping, lawn care, housecleaning, etc.?" In the market cost approach, one asks: "What is the foregone market wage of a person for the time spent doing household production activities? If one person makes $100/hr in the labor market and it takes that person an hour to mow the lawn, the cost is $100 excluding capital, gas, etc. The so-called housekeeper approach is just that: What is the cost of hiring a housekeeper to do some or all non-market work? While all methods are used by forensic damages experts, the methods are not equally acceptable.
Replacement Cost / Specialist Cost Method
The replacement cost method requires the financial expert to know what household production activities would have been done "but-for" some event and the local market value of each activity. Special purpose surveys designed and conducted by the expert are expensive and time-consuming and rarely used; instead, the damages expert is likely to rely on time-use studies offered alone or in combinations with activity-specific market wages.
Market / Opportunity Cost Method
Leaving aside how to consider particularly thorny issues like possible commuting costs and tax issues, let's assume two homes in the same location with nearly identical families and lawn sizes. Again we'll use the grass cutting example and assume the husband takes an hour to cut the grass. In one home, the man is a brain surgeon making $400/hr and the other home the man is school teacher making $20/hr. In the market approach, the one hour needed to cut the grass "costs" $400 for one person vs. $20 in the second home, a result that may strike some as absurd. Few damages experts actually use the market approach but it's good to be prepared on the odd chance you may encounter such an expert in court.
Housekeeper Method
Similarly, the housekeeper approach requires knowledge of market wages for such workers but a housekeeper usually does not do all the tasks included in a basket of nonmarket work so this approach is not as accurate as replacement cost approach. A 2003 survey of forensic economists found the following methods used to assess the dollar value of lost household services:
This rank ordering is similar to the conclusion reached in a survey article, namely, "the specialist-cost technique is more accurate than pricing hours with the wage of a housekeeper and less controversial than pricing hours with opportunity wage."
Time-use surveys are widely-used to identify activities of household work. Differences in the surveys are due to where done (local or national), when done and type of household (intact husband-wife, single, or presence of children or elderly person). The employment status of adults in the household is also a key issue. Sometimes the financial expert may believe it appropriate to ask the plaintiff (or survivors) about the household production activities of the injured or deceased individual. This may add a measure of credibility but is generally not a good idea to base an analysis of household production value only on such interviews: time-use surveys are best left to the experts.
A time-use survey includes virtually all uses of time and the analyst needs to decide which activities to use in the analysis of household production. The following list is suggestive, "Yes" means to include, "No" means not to include, and "Maybe" means it depends on the facts of the case.
One of the best time-use surveys, e.g., national focus, recently-conducted, and including different family types, is the US Department of Labor's Bureau of Labor Statistics (BLS) American Time Use Survey (TUS). Information on TUS is available either directly from BLS or in combination with activity-specific wage information, another BLS-supported survey, from ExpectancyData, Inc., Dollar Value of a Day, 2003. The following table is drawn from that publication, Table 22, p.40.
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Stanley P. Stephenson, Ph.D. Economics, has provided Economic Litigation services in more than 300 cases. His experience includes Business Valuations, Economic and Quantitative Analysis and Market Assessments.
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