In litigation involving wrongful death, personal injury and breach of employment contracts, forecasting the wage rate is often a necessary step when calculating damages. Forecasted future changes in the wage rate are generally attributed to two components, forecasted changes in the productivity of labor and inflation.l The theoretical reason for making the wage rate a function of productivity and inflation stems from the neoclassical proposition that the wage rate is equal to the product of the marginal productivity of labor and the price of the output received by the manufacturer. So, when measures of productivity and inflation are used to justify a growth path for the future wage rate, they are proxy variables for, respectively, the marginal productivity of labor and changes in the price of the output.
This paper reviews the adequacy of the proxy variables commonly used for the marginal productivity of labor and the price of the output by checking to see if the characteristics of the proxy variables are similar to the characteristics of the subject variables. Based upon the sectors studied, we conclude that average productivity is not a good proxy variable for marginal productivity but, the rate of inflation is a good proxy for the change in the price of the output. Both of these conclusions have important implications for a forensic economist. First, changes in average productivity should not be used to justify changes in real wages. Second, the practice of forecasting real wages and discounting by a real interest rate is legitimate.
In Section II we explain the choice of subject variables and proxy variables used in the study. In Section III we compare the subject variables to the proxy variables and discuss the implications of the results. We present the conclusions in Section IV.
Dr. Gary R. Albrecht has more than 25 years of experience specializing in Economic Forecasting and Forensic Economics. The Director of Econometric Modeling at the University of Kansas, his research has been published in the Journal of Forensic Economics, Journal of Legal Economics, Trial Briefs, and The Earnings Analyst.
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