Regional Investment and Workers' Compensation in a State Econometric Model
Diltz, John David
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https://hdl.handle.net/2142/67671
Description
Title
Regional Investment and Workers' Compensation in a State Econometric Model
Author(s)
Diltz, John David
Issue Date
1980
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, General
Language
eng
Abstract
Worker's Compensation insurance costs have risen dramatically in the State of Illinois over the past five years. A large scale econometric model of the State of Illinois is estimated in order to simulate the impact of Workers' Compensation insurance rate increases on the Illinois economy.
The Illinois Econometric Model is a two hundred and fifty-six equation structure. The model emphasizes Illinois labor markets. It is among the first models structured around the modeling of income accounts. Distinctive features of the model include: disaggregation of the manufacturing sector into two-digit SIC industries, utilization of relative factor costs to explain employment and investment, estimation of explicit production functions, and a complete theoretical development of the investment function specification.
Investment in manufacturing industries is one of the most important sets of structures in the state model. Therefore, the theoretical underpinnings for the investment structures are given special treatment. A regional investment model which is an extension of Jorgenson's neoclassical formulation is developed and estimated for two-digit SIC manufacturing industries. The resulting theory represents the first attempt to build a neoclassical model of regional investment without assuming factor costs to be uniform across all regions of the country.
The Workers' Compensation program is treated as an ad valorem tax on payroll levied against business firms operating in Illinois, combined with a public insurance program. A theoretical analysis shows the effect of the program on employment and investment in the state. The econometric model described earlier in the thesis is solved to simulate the Illinois economy for the period from the fourth quarter of 1979 through the fourth quarter of 1981. Subsequently, the model is solved for the same time period to replicate the state economy under a regime in which Workers' Compensation insurance rates are reduced by fifty percent, up to a three percentage point maximum. A comparison of model solutions under the two alternative regimes leads to inferences concerning the effect on the Illinois economy of the Workers' Compensation program. Several alternative solutions were obtained, each representing different assumptions as to how workers perceive the certainty equivalent of Workers' Compensation benefits.
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