ESTIMATING THE INDIRECT COST OF ILLNESS - AN ASSESSMENT OF THE FORGONE EARNINGS APPROACH

Objectives. This study attempted to assess (1) the accuracy of estimat es of the indirect cost of illness and death computed with the human c apital (forgone earnings) method and (2) the sensitivity of these esti mates to key assumptions and parameters. Methods. The study used data from the annual Current Population Surveys of 1964 through 1988 to com pare the earnings experience of cohorts of White men aged 18 through 6 5 with predictions made with the human capital method. The study then assessed the sources and magnitude of the observed differences. Result s. Predictions of forgone earnings can be as much as 18% greater or 20 % smaller than actual earnings, under identical assumptions, depending on the data used. While in most cases errors are quite small, alterna tive, equally plausible estimates of forgone earnings may differ by as much as 50%. Estimates differed mainly because of (1) the cross secti on chosen to make the predictions and (2) assumptions about future ear nings growth. However, other factors, such as cohort size, also contri buted to variation. Conclusions Researchers and policymakers should be very careful in making and interpreting estimates of the indirect cos t of illness and death.