Occupational Safety Research Paper

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Highly publicized job accidents, such as mining disasters, create the impression that occupational safety is a haphazard  enterprise. Although accidents are random  events, occupational safety levels are governed by a variety of social institutions and display systematic patterns across time  and  across different types of industry. Thus,  the probability of occupational injuries and illnesses varies in a quite predictable manner even though the occurrence of particular accidents usually cannot be foreseen.

From the standpoint of economic analysis, firms provide specific safety levels by striking a balance between the costs to the firm of accidents and the costs of providing greater safety. The differences across industries in the costs of providing safety account for the higher risk levels of industries such as mining and construction, where eliminating risks is very costly, as compared to safer industries such as banking. Firms will incur these costs to promote safety if they have a financial incentive to do so. The chief sources of the financial incentives that lead firms to provide a safe workplace are wage premiums that they pay to workers on risky jobs, workers’ compensation costs, and government health and safety regulations.

The economic analysis of occupational safety dates back to Adam Smith. Workers require higher pay, or compensating differentials, to be attracted to dangerous jobs. This wage premium usually is not in the form of hazard pay but rather is part of the higher overall pay package required to attract workers to risky jobs. In the United States, these wage premiums totaled $229 billion in 2000, or about 5 percent of all worker wages. Studies have documented  similar but  lower wage premiums throughout the world in countries ranging from India and Taiwan to the United Kingdom.

A useful shorthand puts these wage premiums in perspective: Suppose that the average worker faces an annual occupational fatality risk of 1  in  20,000  and  receives about $350 for facing that risk. Put somewhat differently, if there were 20,000 workers facing a comparable risk, there would be one expected death in the group and $7 million paid in wage compensation for risk. Thus,  the total wage compensation per expected death is $7 million, which economists often refer to as the value of statistical life (VSL). This $7 million figure is the average VSL estimate based on U.S. studies.

Estimates of the VSL only pertain to the tradeoffs workers make between very small job risks and the wages they require to accept these risks. They do not imply that a worker would be willing to accept certain death for a payment of $7 million, or that a worker would have the resources to pay that amount to avoid the certainty of a job-related death.

Although the incentives that wage premiums for risk provide are often substantial, market forces may not be adequate. Market incentives will fall short if inadequate knowledge of health and safety risks impedes worker decisions. Market  incentives also do  not  capture  society’s broad altruistic concerns with worker health. Finally, wage premiums alone do not address the insurance needs of injured workers.

As a result, several modes of government intervention have been developed to address these shortcomings. Since the early twentieth century, states have instituted workers’ compensation plans that  compensate workers for accidents irrespective of where fault lies. The workers’ compensation premiums that firms pay totaled $32.9 billion in 2003. These costs create powerful incentives for safety, as firms with better safety records pay lower insurance premium rates. This linkage of premiums to accident-prevention  performance is particularly strong for large firms. Statistical estimates indicate  that  worker fatality rates would  be  one-third  higher than  they are now  in  the absence of these safety incentives.

Beginning with  the  passage of  the  Occupational Safety and Health Act of 1970, there has been direct federal regulation of workplace safety in the United States. These regulations have largely taken the form of standards that either specify safe workplace technologies or set maximum  limits on  exposures to  dangerous chemicals. In addition, there are also important informational requirements, such as standards governing the proper communication of hazards associated with various chemicals. Firms are subject to inspection to ascertain if they are meeting regulatory standards, and those firms out of compliance incur fines. The magnitude of these financial penalties has been modest but rising over time, with total fines in fiscal year 2002 equaling $149 million. Most published studies indicate an  effect on  occupational injury rates on  the order of a 2 to 4 percent reduction in the frequency of job injuries, but the increase in penalty levels since the 1990s may generate greater effects on safety.

The net effect of these different societal mechanisms to reduce risk has been a tremendous improvement in occupational  safety. The  workplace fatality  rate  has declined steadily over the past century. The  workplace fatality risk was ten times greater in 1928 than in 2003, and the 2003 figure represents a 25 percent decline over the preceding decade, though some of that improvement may be due to changes in data reporting practices.

Two contributors to this long-term improvement in safety are noteworthy. First, the rise in societal wealth has increased the value workers and society more generally place on risk reduction. This increased wealth boosts the wage premiums firms must pay to attract workers to risky jobs, thus leading firms to introduce safer workplace conditions to reduce these costs. Greater societal wealth also increases public support for government regulation, which tends to be less pronounced in less advanced economies. Second, technological improvements over time have led to the production of safer technologies and improvements in safety equipment. Consequently, the costs of promoting safety have also declined so that firms can strike a balance between the costs of safety improvements and the costs of a risky workplace that leads to lower risk levels.

These differences in  wealth and  technologies also contribute to differences in safety levels across countries. International  differences in workplace safety levels and regulatory regimes are to be expected given differences in societal wealth. Less advanced countries also may lack access to modern, safer technologies. However, increased affluence and  economic  progress in  these  developing countries is likely to increase their safety levels over time.

Bibliography:

  1. Insurance Information I 2005. Fact Book 2005. New York: Author.
  2. National Safety 2004. Injury Facts. Itasca, IL: Author.
  3. Smith, A [1776] 1994. The Wealth of Nations. New York: Random House.
  4. Viscusi, W. Kip. Rational Risk Policy. Oxford: Clarendon Press/Oxford University Press.

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