By Dr. Ken Manges, Ph.D. | Forensic Psychologist
Earning capacity is not simple math. Earning capacity is sometimes confused with actual earnings, expected earnings or earnings potential.
- Earning capacity is defined as what a person can be expected to earn when they maximize their actual earnings.
- Actual earnings are defined as gross wages.
- Expected earnings are what a person can be expected to earn, based on an averaging of their prior actual earnings.
- Earnings potential is what a person can be expected to earn when they have chosen a career path dependent on personal choice or self-imposed limitations, not what they can otherwise earn in the marketplace based on their training and expertise.
A person’s earning capacity, actual earnings, expected earnings and earnings potential would be affected by the following:
- What a person is physically or mentally able to do
- The market demand and supply
- What they are willing to accept as a wage for their work
- How much they want to work
Essentially, a person’s wages are a consequence of the market’s supply-demand ratio along with:
- Variables of a disability
- Person’s training and experience
- Person’s intent and interest in their pursuit of work
Here some different scenarios for earnings capacity and actual earnings.
- A person may be starting a new career with a previously higher or lower past career earnings record. When their earning capacity is based on a past career, it could yield a number inconsistent with what their future earning capacity will be in their new career. Lower or higher paying past or future career earnings will affect the analysis. The basis of the rationale for using either the old or new career as their earning capacity has to be justified, not merely stated as fact.
If a person has been injured or cannot return to their former work due to a disability and they are offered alternative work or work at a reduced wage, they may choose not to take an offer at the new or different job for various reasons. In some instances, when they do not re-enter the workforce (e.g. unable to perform all work or the work they did pre-injury and cannot be re-trained) their actual past earnings can arguably be considered the basis for an estimate of their earning capacity because they maximized their earnings at the time of stopping work.
Under these circumstances, if disabled, their actual earnings may be considered a maximization of earnings (their earnings capacity) based on their pre-injury wages. When their personal choice is the basis for not re-entering the workforce, post injury and/or when they are capable of being trained or re-trained, the disabled and non-disabled person’s actual past earnings do not reflect their future earnings capacity because personal choice and pursuit of training effects wages and their future earnings capacity could change. Their choice not to re-train affects future earnings capacity, not actual past earnings.
- A person who had an earnings stream in the past and chooses to stay at home, work at a lower wage or work part-time may not realize their past earning capacity. Their past earning capacity could be considered a basis for future earning capacity, even though they might not go back to work at their prior job. Their past earnings would be their maximized earning capacity when based on their personal choice of not seeking alternative employment. Choosing not to work or not to find alternative employment does not mean their earning capacity has been reduced, it means their willingness to work has affected their earnings potential.
A person who was a worker then became a homemaker and is now divorced and re-entering the workforce, may now have an overestimated earning capacity when based on their employment before their exit from the workforce. A person who only worked part-time during the marriage or at a job unrelated to their past training and experience would be in a similar circumstance, i.e. not realizing their earning capacity.
When earning capacity is based on past work, earning capacity is not a good predictor of future earning capacity when their participation in the workforce was part-time, not in their field of expertise, or completely interrupted due to family obligations. Part-time work, work outside of their expertise, or complete interruption of work for an extended period of time, results in reduced actual earnings or when completely interrupted, obsolescence of work skills. Their actual earnings would represent their past earning capacity, which would have to be discounted based on the year in which the income was earned. However, their future earning capacity could change should they acquire additional training and an upgrade of their skills.
A person who was maximally realizing their earning capacity but chooses to step down from a high paying occupation will earn less. Even if they choose not to pursue the level of their past actual earnings, their earning capacity has not changed. What has changed is their actual earnings. Even if they choose not to work at their former level, their earning capacity has not changed. They are still capable of a higher level of earning capacity but because they have chosen not to work at the same income level or alternatively at the same career, their actual earnings change, not their earning capacity. They will earn less money due to choice, not because of an inability to earn.
- A person may not be able to obtain a job due to the current market’s supply and demand. But the person’s earning capacity in their chosen occupation has not changed. Their actual earnings can be less or even zero because they cannot get a job in their geographical area in their chosen field. Earning capacity in a career or occupation is based on what that person will earn when they have maximized their skill in their field. Earning capacity for a career or occupation is independent of personal choice, age, and known and unknown discrimination variables. But one or more of these variables, by themselves or in combination, can influence a person being hired and, in turn, affect their actual earnings.
As suggested at the beginning earning capacity is not simple math. With any questions please contact.