If you suspect the encoder is defective because the output signals never switch, consider this:
The single LED used in the encoder and commutation circuitry is powered from the +5 Hall input power. While eletrical isolation between the commutation and incremental encoder signal exist, there is a single LED providing the light source for each. That means if 5 volts is applied only to the encoder input power portion of the encoder and not the Hall 5v input, the encoder circuitry will not work.
If the encoder signals are not being generated from the device, make sure that both the encoder 5V and Hall power supply voltages are present.