Lost earning capacity is not lost wages
The two phrases get used interchangeably and they are different claims. Lost wages are pay you actually missed: a documented, backward-looking figure supported by pay stubs and an employer letter. Lost earning capacity is forward-looking and hypothetical — the reduction in what you are now able to earn over the rest of your working life, whether or not you have taken a lower-paid job yet.
Capacity is what the damages award has to replace, and replacing it takes three ingredients. The first is the annual differential: what you could have earned less what you can still earn. The second is the fringe benefit load, because employer contributions to health insurance and retirement are part of the compensation the injury took away; the US Bureau of Labor Statistics publishes employer costs for employee compensation quarterly, and total benefits typically run to a substantial fraction of wages. The third is time: how many more years you would have worked, and what a dollar arriving in one of those years is worth today.
That last ingredient is what makes this a present value calculation rather than a multiplication. Awarding the undiscounted total would overcompensate, because the claimant receives the whole sum immediately and can invest it. Courts have required discounting to present value since Chesapeake & Ohio Railway Co. v. Kelly, 241 U.S. 485 (1916), and the Supreme Court laid out the modern framework — including the treatment of wage inflation — in Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523 (1983).
The formula, and why only one rate really matters
Each future year's loss is the first-year loss grown forward, then pulled back to today: PV = Σ L₀(1+g)^(t−1) / (1+d)^t. Write k = (1+g)/(1+d) and the sum has a closed form, PV = L₀ × (1 − k^N)/(d − g), which is worth knowing because it makes the structure obvious.
The growth rate and the discount rate never act independently. Only their ratio appears. That ratio defines the net discount rate, i = (1+d)/(1+g) − 1, and a case with 3% growth against a 5% discount produces exactly the same present value as a case with 0% growth against a net rate of 1.9417%. This is why experts argue about the net discount rate rather than about the two components: choosing 6% growth and 8% discount instead of 3% and 5% barely moves the answer, while moving the net rate by a point moves it a great deal.
Two boundary cases fall out of the formula. When d = g the closed form divides by zero, but the sum is perfectly well behaved: every term is L₀/(1+d), so PV = L₀ × N/(1+d). This is the total-offset method that a few jurisdictions require by rule — Pennsylvania is the best known — and it has the practical virtue of removing two contested expert opinions from the trial. When d < g, the net discount rate is negative, k exceeds one, and each later year contributes more present value than the year before it. That is arithmetically coherent but it makes the award grow rapidly with the assumed work-life, so expect it to be contested.
The final term, N, is a statistical quantity, not a plan. Work-life expectancy tables — the Skoog–Ciecka tables are the ones most often cited in US practice — give the expected number of remaining years in the labour force by age, sex and education, already accounting for mortality, unemployment and voluntary withdrawal. Using "to age 67" instead of a work-life figure systematically overstates the claim.
Worked example: a 42-year-old losing $44,000 a year for 18 years
A 42-year-old machinist earned $68,000 and can still earn $24,000 in sedentary work. The employer's benefit load is 22% of wages. Assume 3% wage growth, a 5% discount rate, and 18 remaining work-life years.
- Annual differential. 68,000 − 24,000 = $44,000.
- Add fringe benefits. 44,000 × 1.22 = $53,680. That is the year-one loss, L₀.
- Net discount rate. (1.05 ÷ 1.03) − 1 = 1.9417%. Not 2% — the difference between the rates is not the same as the ratio of them.
- Year one. Loss 53,680.00, discount factor 1/1.05 = 0.952381, present value $51,123.81.
- Year two. Loss 53,680 × 1.03 = 55,290.40, factor 1/1.05² = 0.907029, present value $50,150.02.
- Year eighteen. Loss 53,680 × 1.03¹⁷ = 88,724.86, factor 1/1.05¹⁸ = 0.415521, present value $36,867.01.
- Total. Summing all eighteen years gives $785,348.87. Check it against the closed form: k = 1.03/1.05 = 0.980952381, k¹⁸ = 0.7073961, so PV = 53,680 × (1 − 0.7073961) / 0.02 = 53,680 × 14.630195 = $785,348.87. The two agree.
The undiscounted total of the same eighteen payments is $1,256,886.89. Discounting removes 1,256,886.89 − 785,348.87 = $471,538.02, which is 37.5% of the nominal figure — and that gap is the single largest thing the two sides' economists will disagree about.
How to read the result
The present value factor is the number to check first. It is the present value divided by the first-year loss, and it behaves exactly like an annuity factor at the net discount rate: 14.63 in the worked example means the award is worth about fourteen and a half years of the first-year loss, against eighteen years of actual loss. If your factor is close to N, the net discount rate is near zero and you should confirm that is what you intended. If it exceeds N, the net rate is negative.
The net discount rate is where opposing experts differ, and the range in dispute is usually narrow: forensic economists in US practice typically work with net rates in the low single digits, tied to yields on Treasury securities of comparable duration. Small differences compound over a long horizon. Take the ordinary annuity factor (1 − (1+i)^−N)/i: over 18 years it is 15.069 at a 1.9417% net rate and 16.398 at 1.00%, an increase of 16.398/15.069 − 1 = 8.8%. Over 35 years the same change in the net rate moves the factor from 25.229 to 29.409, an increase of 16.6%. The longer the loss period, the more the rate argument is worth.
Two adjustments this calculator deliberately leaves to you. It does not apply a personal consumption deduction, because that belongs to a wrongful death claim rather than to an injured survivor's claim — a living claimant still has to eat. And it does not tax-affect the earnings. Federal practice under Norfolk & Western Railway Co. v. Liepelt, 444 U.S. 490 (1980) values lost earnings net of income tax, while many state courts use gross earnings; enter after-tax figures in both earnings fields if the after-tax basis applies to your matter, and keep the discount rate consistent with that choice.
Finally, sanity-check the loss period against the claimant's age. A stream that runs past the mid-seventies is asserting a longer labour-force attachment than published work-life tables support, and the calculator flags it.
Present value factor by net discount rate and years of loss
| Net discount rate | 10 years | 15 years | 20 years | 25 years | 30 years |
|---|---|---|---|---|---|
| 0.0% | 10.000 | 15.000 | 20.000 | 25.000 | 30.000 |
| 1.0% | 9.471 | 13.865 | 18.046 | 22.023 | 25.808 |
| 1.5% | 9.222 | 13.343 | 17.169 | 20.720 | 24.016 |
| 2.0% | 8.983 | 12.849 | 16.351 | 19.523 | 22.396 |
| 2.5% | 8.752 | 12.381 | 15.589 | 18.424 | 20.930 |
| 3.0% | 8.530 | 11.938 | 14.877 | 17.413 | 19.600 |
The factor this calculator reports is slightly different in construction — it applies growth from year one and discounts from year one — so use this table for orientation and the calculator for the number.
What goes wrong in this calculation
- Using retirement age instead of work-life expectancy. Work-life tables already subtract expected unemployment, illness and voluntary withdrawal. Counting every year to 67 overstates the claim and invites a straightforward cross-examination.
- Netting the growth and discount rates by subtraction. 5% minus 3% is 2%; the correct net rate is 1.9417%. The error is small on one year and compounds over thirty.
- Forgetting fringe benefits, or double-counting them. Employer-paid benefits are a real loss, but if the post-injury earnings figure already includes benefits, load only the differential once.
- Mixing tax bases. Pre-tax earnings discounted at an after-tax rate, or the reverse, produces a number that means nothing. Pick a basis and hold it across every input.
- Ignoring mitigation. The post-injury earning ability figure should reflect what the claimant can earn with reasonable effort and available retraining, not what they happen to be earning while a claim is pending.
- Treating a household services loss as wage loss. The value of the chores an injured person can no longer perform is a separate head of damage with its own valuation method.
This is the expert's calculation, not a substitute for the expert
In any claim large enough to justify it, lost earning capacity is proved through a forensic economist or vocational rehabilitation expert whose report states the work-life table used, the source of the growth and discount rates, and the basis for the post-injury earning capacity. The arithmetic here reproduces that method faithfully, but the contested inputs — particularly what the claimant can still earn — are opinions that have to be supported by evidence to survive a challenge.
Where this fits and what else to run
Lost earning capacity is usually the largest single component of a serious injury claim, and it sits inside the economic damages line of the personal injury settlement calculator rather than beside it. Enter the present value figure from this page there, not the undiscounted total, or the claim will be overstated and the multiplier will magnify the error.
Related calculations share the same discounting machinery. A settlement paid over time rather than in a lump sum is the same present value question in reverse, handled by the structured settlement present value calculator. In an employment case the forward-looking component is front pay rather than earning capacity, discounted the same way — see the wrongful termination damages calculator. And where the injury is work-related, the recovery is a scheduled benefit rather than a proved economic loss, which the workers' compensation permanent disability calculator computes on an entirely different basis.
One structural point about the award itself: a lump sum handed to a claimant with a permanent disability has to last the whole loss period, and the discount rate embedded in the calculation assumes it is invested at that rate. That assumption is the argument for a structured settlement, which converts the lump back into a guaranteed stream and removes the investment risk the discounting presumes the claimant will bear.