Estimating the indirect cost of illness: An assessment of the forgone earnings approach

Objectives. This study attempted to assess (1) the accuracy of estimates of the indirect cost of illness and death computed with the human capital (forgone earnings) method and (2) the sensitivity of these estimates to key assumptions and parameters. Methods. The study used data from the annual Current Population Surveys of 1964 through 1988 to compare the earnings experience of cohorts of White men aged 18 through 65 with predictions made with the human capital method. The study then assessed the sources and magnitude of the observed differences. Results. 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, alternative, equally plausible estimates of forgone earnings may differ by as much as 50%. Estimates differed mainly because of (1) the cross section chosen to make the predictions and (2) assumptions about future earnings growth. However, other factors, such as cohort size, also contributed to variation. Conclusions Researchers and policymakers should be very careful in making and interpreting estimates of the indirect cost of illness and death.