OCCUPATIONAL SAFETY AND HEALTH REGULATION
Sidney A. Shapiro
John M. Rounds Professor of Law
University of Kansas
© Copyright 1998 Sidney A. Shapiro
An employer will invest in safety and health precautions until the cost is morethan the expense of paying higher wages, workers' compensation, and otheraccident and illness costs. Employees receive additional protection becausegovernments have chosen to augment these financial incentives with regulation. Studies indicate that all three approaches cause employers to invest in healthand safety precautions, but the extent to which injuries and illnesses are reducedis difficult to verify and may be limited in numerous work situations. Theliterature has identified potential reforms, but the viability of key reforms isuncertain. Thus, labor markets, compensation, and regulation are highlyimperfect alternatives concerning the reduction of occupational accidents andillnesses. As a result, continued reliance on all three approaches is indicated.
JEL classification: K31, K32
Keywords: Occupational Safety, Occupational Health, Occupational Risk,Workers' Compensation.
Economic theory predicts that workers will demand additional wages, or a "wagepremium," to compensate them for workplace safety and health risks. Employerswill respond by reducing such risks until it is less expensive to pay workersadditional compensation than it is to invest in additional health or safetyprecautions. In this manner, labor markets should produce the abatement ofsome safety and health hazards, and workers should be compensated for therisks that remain.
Since the early 1900s, governments have intervened to augment these labormarket incentives. According to Darlington-Hammon and Kniesner (1980), virtually every state in the United States enacted some quasi-administrativescheme to award compensation for workplace accidents between 1911 and 1920. Today all fifty states and the federal government administer such programs. In1970, Congress enacted the Occupational Safety and Health Act (OSH Act)which established the Occupational Safety and Health Administration (OSHA)in the Department of Labor to regulate workplace conditions. States have theoption to accept federal regulation of employers or to administer their own safetyand health regulations subject to OSHA's approval and supervision. Othercountries have also implemented administrative regulation. These governmentalefforts indicate a political judgment that labor markets produce insufficientprotection for workers.
This essay describes how economic theory explains the role of labor markets,compensation, and regulation in addressing occupational injuries and illnesses. I also report on studies that have tested the effectiveness of each of thesemethods, and I discuss reforms to improve the effectiveness of each approach.
Readers seeking an overview of these issues can consult several books andarticles. Viscusi (1992, 1983), Robinson (1991), Dickens (1984), Schroeder andShapiro (1984), Rea (1983), Chelius (1974), and Oi (1974) offer generalcomparisons of the impact of labor markets, compensation, and regulation onworkplace safety and health.
This essay confirms Komesar's (1994) insight about options for makingsociety safer and healthier. When governments choose between market,compensation, and regulatory approaches, Komesar contends that "[t]he choiceis always a choice among highly imperfect alternatives." Labor markets,compensation, and regulation are "imperfect" alternatives concerning thereduction of occupational accidents and illnesses because none of thesealternatives is reliable. Instead, each is limited by significant constraints, whichare explained below.
Reformers seek to address these constraints, but the constraints areintractable in many instances. Thus, it appears to be necessary to rely on allthree approaches, because no one (or even two) approaches is likely to producean appropriate level of occupational safety and health. Together, however, labormarkets, compensation, and regulation can come closer to this elusive goal.
Economic theory establishes that labor markets create several incentives foremployers to reduce occupational safety and health risks. Economic studiesconfirm the existence of one such incentive: the demand by workers foradditional compensation, or a "wage premium," for exposure to safety risks. Theadequacy of such wage premiums, however, is in dispute. Moreover, analystsgenerally concede that workers are unlikely to be compensated for most healthrisks. Governments have attempted to aid workers in obtaining additionalcompensation by promoting the distribution of information about workplacerisks and by addressing workers' lack of bargaining power.
An employer will determine whether to prevent workplace accidents or illnessesby comparing the cost of prevention with the cost of not taking such action. Employers that fail to reduce workplace hazards can expect to pay increasedlabor costs because workers will demand additional compensation for enduringoccupational safety and health risks. For a given level of workers'compensation, workers will demand a wage premium that compensates for anyinadequacies in ex post compensation. In other words, assuming workers arefully informed about job risks, they will seek compensation equal to the expectedcost of an injury or illness not covered by workers' compensation. In addition,the employer may have to pay for the cost of recruitment and training ofadditional workers to replace those persons who are injured or killed and otherrelated costs. To avoid these expenses, an employer will make safety and healthimprovements until the cost of additional precautions is more than paying wagepremiums and other related costs.
In this manner, labor markets should produce the abatement of some safetyand health hazards and workers should be compensated (ex ante and ex post)for the risks that remain. The employer's assumption of these costs will make themarket for the employer's product or service more efficient. Because theemployer assumes these costs, the price of the product or service will reflect thecost to society of the production of the good or service, including the cost ofoccupational illnesses and injuries.
Studies by Viscusi (1983) and other analysts (listed and described by Viscusi)find that workers in risky jobs receive higher wages after controlling foreducation, experience, and other market characteristics. Viscusi estimates thataverage annual compensation for all job risks in the United States totals about$400. Similarly, Robinson (1991) estimates that workers exposed to significantrisks of occupational injuries received annual wage premiums of about $300 -$500. This amounts to about a 5-8 percent increase above the earnings ofunexposed blue-collar workers. Fishback (1986) cites empirical evidence thatminers in the United States in the 1900s received risk compensation. Weiss,Maier and Gerking (1986) discovered risk compensation in Austrian labormarkets.
By comparison, Leigh (1991), who reviewed several prior studies, found thatonly variables which reflected job hazards resulting in death were associatedwith compensating wages, and that among studies using death rates, only somestudies found evidence of wage premiums. Further, among studies findingevidence of such wages, the amount of compensation paid for the risk of deathvaried widely. Leigh's own study found evidence of compensating wages basedon Bureau of Labor Statistics fatality data, but he found no correlation based onworkers' compensation fatality data. A review by Dorman (1996) of the literatureon compensating wages, including Leigh's study, characterizes the evidence forwage premiums as "weak at best."
The empirical evidence is mixed concerning the extent to which workers obtainwage premiums for dangerous work. Moreover, even when workers obtaincompensating wages, there is an issue of the adequacy of the compensation. Asthe last section revealed, studies finding compensating wages indicate thatworkers receive only modest wage premiums. Even a small wage premium,however, is significant if workplace risks are not very large. For example, Viscusi(1983) concludes that once analysts take into account the nature of a risk andthe population exposed to it, it is evident that workers are well paid for the risksthat they face. According to Viscusi, "most" of the "reasonable" estimatesindicate that workers demand between $3 and $7 million compensation forexposure to potentially fatal accidents. Workers, however, may receive lesscompensation than Viscusi estimates.
First, if the risk of a fatal accident is greater than the data on which Viscusirelies, workers receive less compensation than he estimates. McGarity andShapiro (1996, 1993) found that experts believe existing statistics understate theextent of workplace fatalities (and injuries) in the United States by an unknownand perhaps significant extent.
Second, the amount of additional compensation that a worker will seek forhazardous work is a function of the worker's knowledge and understanding ofexisting risks. Robinson (1991) cites survey data which reveal that workers'knowledge is incomplete. He found, for example, that 33 to 50 percent of workersin occupations with high rates of disabling injuries and illnesses reported thatthey faced no significant safety or health hazards. Carmichael (1986) adds thatbecause the dissemination of safety information in labor markets takes time,workers may lack adequate information when they seek a job. Oi (1974) notes,however, that full information by all workers is not necessary to obtain adequatecompensating wages. What is important is that the marginal worker possess fullinformation.
Third, workers must be able to discern marginal differences in risks tobargain effectively for hazard pay. Yet, as McGarity and Shapiro (1993), Dickens(1984), and Lave (1983) discuss, such distinctions are especially difficult to makein the context of occupational illness, where huge uncertainties befuddleattempts to predict the precise effects of health risks on longevity and thequality of life once a disease has manifested itself.
Further, as Dorman (1996) discusses, a worker's evaluation of risk may bedistorted by psychological effects in the way individuals process riskinformation. Studies in the psychological literature suggest that people do notprocess risk information in the rationale manner that economic theory assumes. For example, people engage in several forms of "bounded rationality" whichsimplify and filter risk perceptions. Risk perceptions are also impacted byattitudes towards risk, such as the fact that persons tend to fear more acutelythose risks they cannot control. Cognitive dissonance is another factor,because it induces people to ignore or alter their perceptions of risk in order toavoid unpleasant conflicts with established beliefs.
Fourth, the additional compensation that a worker can obtain for hazardouswork is a function of the worker's bargaining power. Boden and Jones (1987)point out that estimates of wage differentials are substantially higher forunionized employees than for nonunionized employees. Moreover, Robinson(1991) cites data indicating that only poorly educated and low skilled employeesare likely to take dangerous jobs. His calculations reveal that hazardous jobspay 20 to 30 percent less than safe employment after taking into accounteducation and skill levels. He concludes that persons with training andeducation avoid such jobs because safer employment pays more, and thathazardous jobs are more likely to go to minority workers. Robinson found thatHispanic males were 80 percent more likely to suffer a disabling injury or illnessthan whites in California, and that black men were 40 percent more likely.
McGarity and Shapiro (1993) argue that even educated and skilled workersmay be hesitate to leave dangerous jobs because the hazardous pay isinadequate. Such workers may hesitant to change jobs because of the loss ofhealth benefits, pension rights, and seniority, the expense and disruption ofrelocation, and the difficulty of becoming familiar with a new employer. Bodenand Jones (1987) hypothesize that these reasons explain the relatively low wagepremium received by asbestos installation workers who were familiar with thesignificant risks that they faced. A study by Kahn (1987) finds that occupationalsafety levels in nonunionized firms reflect only the preferences of workers withthree or less years of job tenure, who are, he presumes, the most mobile workersin the firm.
Dorman (1996) proposes that game theory be used to study the relationshipof workers and employers concerning issues such as risk compensation. Heargues that because game theory accounts for strategic behavior, it can clarifyhow cooperation and conflict inside a corporation impacts issues of publicpolicy such as the protection of workers.
Workers may be inhibited in obtaining wage premiums for workplace safety andhealth risks because of the lack of information or inadequate bargaining power. Analysts have discussed what steps governments can take to address theseproblems.
Regulatory policies that increase workers' access to risk information shouldimprove market performance. Government action is likely to be necessarybecause, as Viscusi (1983) points out, the "aberrant characteristics ofinformation as an economic good" inhibit the creation of market arrangementsto produce such information.
OSHA's hazardous communication standard is a good example of this typeof government mandate. The regulation requires chemical manufacturers toprovide a material safety data sheet, based on the available literature, for eachhazardous product that they produce or use. The information is then madeavailable to workers who are exposed to these products. Carle (1988) proposesimprovements in OSHA's regulation, while Viscusi (1983) supports additionalregulation. He recommends that employers be required to apprise workers of thenature of the risks that they face, the risk level of the firm (death, injury, andillness rates), its relative risk as compared to other firms in the industry, andother relevant risk information.
The impact of additional information will depend on the ability of workersto use risk information. As noted in the last section, workers may have limitedcognitive capacities or psychological defense mechanisms that impede rationaluse of risk information. Government can address these limitations by requiringthat employers train workers to evaluate the information that they receive.
A worker's ability to obtain a wage premium is also dependent on theperson's bargaining power. Workers would have more bargaining power if theycould not be fired for their refusal to undertake hazardous work. Rea (1983)reports that some Canadian provinces have given workers the right to refuseunsafe work. McGarity and Shapiro (1993) support similar reforms for the UnitedStates.
The wage premiums received by workers constitute ex ante compensation foroccupational accidents and diseases. Workers also receive ex postcompensation through workers' compensation and tort law.
Spieler (1994) provides a detailed description of the role of workers'compensation in the United States. Prior to the early 1900s, workers could suetheir employers for negligence if they were injured at work, but these tort suitswere frustrated by a number of legal doctrines that prevented workers fromrecovering. According to Chelius (1976), many state legislatures had abolishedsome of these defenses prior to 1911. Recovery under the tort system remained
inadequate, however, which prompted passage of workers' compensation laws. These laws discarded most of the remaining legal obstacles to recovery and, asa tradeoff, established two important limitations on workers. States prohibitedworkers from suing their employers under tort law, and they limited the typesand amount of damages that workers could recover. Morgenstern (1982) has ageneral description of the role of compensation in other countries.
Employers should respond to higher compensation costs by investing insafety and health improvements. Yet, analysts have been unable to establish aclear correlation between such higher costs and a reduction in workplace injuriesand fatalities. Despite the lack of evidence, some analysts argue that workers'compensation provides a significant incentive to make safety and healthimprovements, but other analysts dispute this conclusion. What is clear is thatworkers' compensation fails to reimburse employees for accident and illnesscosts that are not paid by wage premiums. Government may improve thefunction of workers' compensation by requiring employers to pay highercompensation, mandating that insurance rates more accurately reflect anemployer's safety experiences, or imposing a tax-based system of compensation.
An employer will determine whether to prevent workplace accidents or illnessesby comparing the cost of prevention with the cost of not taking such action. Forrisks that are not prevented, the employer will be responsible for paying workers'compensation to injured or ill employers. A firm will invest in safety and healthprecautions until the cost is more than the cost of paying higher wages, workers'compensation, and other accident and illness costs. If workers are fullycompensated (ex post and ex ante) for the accidents and illnesses which are notprevented, the market for an employer's product or services will be more efficient. The market is more efficient because the price of the product or service willinclude the cost of occupational accidents and illnesses associated with itsproduction. In this manner, the price will reflect the actual cost to society of theproduction of the good or service. The actual cost to the firm of payingcompensation, however, will depend on the nature of its insurancearrangements. Insurance arrangements can reduce a firm's incentive to preventfuture accidents and illnesses as explained below.
Although employers pay billions of dollars for workers' compensation, analystshave been unable to verify that higher costs are associated with a reduction inworkplace injuries. Some studies even find that higher costs are associated withan increase in injuries.
The cost of workers' compensation in the United States was about $62billion in 1992 according to Boden (1995). Viscusi (1992) points to this cost asevidence that workers' compensation is more influential than OSHA in promotingworkplace safety because employers paid only about $10 million in OSHA finesin the same year.
The empirical evidence, however, is equivocal concerning whether workers'compensation induces employers to take safety precautions. Boden (1995)reviewed sixteen studies (which he lists and describes) which tested therelationship between an increase in workers' compensation costs and workplaceinjuries, as measured by injury statistics or workers' compensation claim rates. Most of the studies concluded that injuries increased or remained unchangedwhen benefit levels rose. A study by Moore and Viscusi (1989), however,concludes that the average fatality rate would have been 22 percent higher ifthere had been no workers' compensation. By comparison, Butler and Worrall(1991) report that "virtually" all studies of claim usage in workers' compensationfind that an increase in indemnity benefits increases workers' compensationclaim frequency.
Some analysts interpret the previous data as supporting the conclusion thatworkers' compensation provides a significant incentive to make safety andhealth improvements. They argue that the data do not reveal this correlationbecause various actions by employees offset the reduction in compensationclaims attributable to employer safety improvements. Other analysts argue thatworkers' compensation does not create significant incentives for employers toinvest in safety and health improvements because of the impact of insurance andother factors.
The impact of workers' compensation on occupational safety and health alsodepends on the extent to which workers are compensated for their injuries andillnesses. Despite the large cost of workers' compensation, employers pay foronly a portion of the cost of workplace accidents and for almost none of the costof occupational illness.
Employee behavior may explain why increases in workers' compensation costsmay not have produced lower injury rates. According to Butler and Worrall(1991), an increase in benefits will increase the propensity of workers to fileclaims for two reasons. When benefits are increased, workers are willing toundertake greater risk than previously and more injuries will occur. Also,workers have a greater incentive to file a claim for any given level of risk. Butlerand Worrall characterize the former response as a "risk bearing moral hazard"and the latter behavior as a "claims reporting moral hazard." In addition, claimsmay increase because higher benefits induce additional fraud. The additionalclaims which result from these three types of behavior, if large enough, couldoffset any reduction in compensation claims attributable to employer safety orhealth improvements undertaken in response to increased compensation costs.
According to the "risk bearing moral hazard" theory, workers are lessvigilant and therefore suffer more (and more serious) injuries because higherbenefits diminish the personal economic risks associated with such injuries. Ifsuch behavior offsets the impact of safety improvements by employers, as Butlerand Worrall (1991), Moore and Viscusi (1990), Fishback (1987, 1986) andLyttkens (1988) suggest, this theory would explain the positive relationshipbetween increased workers' compensation costs and injury rates. McGarity andShapiro (1996) are skeptical of this explanation, however, because workers havestrong economic and other incentives to avoid injuries. As discussed below,workers receive less, sometimes far less, than the actual costs of their injuriesand illnesses. McGarity and Shapiro also doubt the idea that the prospect ofmoney in the future will persuade a significant number of people to risk severepain, hospitalization, dismemberment, and even death in the present.
The second explanation of employee behavior focuses on the "claimsreporting moral hazard," which is also characterized as a "reporting" effect. According to this explanation, higher workers' compensation only increases thenumber of accident reports and not the absolute number of injuries. Sinceworkers loose less income if they miss work, they may report more injuries andstay off work longer.
Researchers have evaluated this second type of moral hazard by focussingon the link between workers' compensation rates and events that should not besubject to a reporting effect. Some studies have focussed on the relationshipbetween higher compensation rates and fatalities. Because fatalities are clear-cutevents, there should be no overreporting. Moore and Viscusi (1990) and Ruser(1993) found that increased benefits levels were associated with reduced fatalityrates, but Butler (1983) discovered that benefit increases were associated withhigher fatality rates. A study by Robertson and Keeve (1983) compared theimpact of benefits levels on sprains and strains as compared to more "objective"injuries, such as lacerations and fractures. This comparison revealed thatreported injuries of both types increased with benefit levels, although the effectwas stronger for sprains and strains. Kniesner and Leeth (1989) claim toestablish the validity of the reporting theory based on a computer simulation.
A study by Butler, Durbin and Helvacian (1996) attributed most of thesignificant increase in workers compensation claims for soft tissue injuries in the1980s to moral hazard responses by employees and also by physicians. Aphysician in a health maintenance organization (HMO) may earn more bymisclassifying a soft tissue injury as compensable in the workers' compensationsystem, because this permits the physician to avoid a payment cap imposed bythe employee's health insurance company.
Higher benefits might also induce more cases of fraud. For example, Statenand Umbeck (1986) propose that the practical need for administrators to screencompensation applicants on the basis of observable characteristics creates thepotential that workers can manipulate the evidence at critical margins. Theyfound evidence to support such a "signaling effect" among air traffic controllerswho sought compensation for stress-induced impairment. Burton (1992),however, concludes there is a "lack of supporting quantitative evidence" and a"paucity of compelling qualitative analysis" that significant fraud occurs.
Moral hazard behavior may explain why analysts have had difficulty finding acorrelation between higher compensation costs and a reduction in accidents andillnesses. Another explanation is that workers' compensation does not createsignificant incentives for employers to invest in safety and health improvements. Employers may fail to take safety precautions in response to highercompensation costs for two reasons. First, workers' compensation insuranceaccurately reflects an employer's safety experience only for the largest firms. Second, there may be less expensive ways for employers to decreasecompensation costs than to make safety and health improvements.
Spieler (1994) explains that the price of workers' compensation insurancedoes not reflect, or only partially reflects, the claims experience of mostemployers. The sensitivity of premiums to claims experience varies inverselywith the size of the firm. The smallest firms, which constitute the majority ofpurchasers of all insurance, pay premiums that have no relationship to theiractual claims experience. Because small firms have so few employees, insurancecompanies view their individual claims experience as too random to have anypredictive value. Insurance companies therefore base the cost of insurance forsmall employers on the claims experience of a class of similar employers. Thus,small employers have only a weak economic incentive to take safety precautionsbecause their actual claims experience will have little effect on their futurepremiums.
Larger firms, which pay premiums based in part on claim losses, have agreater incentive to engage in injury prevention. The extent to which these firmsare rated according to their claims experience depends on the credibility orpredictive value of that experience.
Only the largest employers are self-rated, which means they pay rates thatare based entirely on their claims experience. These firms, and firms that self-insure, therefore have the greatest economic incentive to reduce workplace risks. According to Victor (1982), however, the incentives for prevention are greaterfor self-rated firms in hazardous industries than for firms that self-insure in thesame industries.
Analysts have compared the reduction in injuries at large and small firms todetermine if there is a "experience-rating effect." Some studies have found thathigher compensation costs are associated with a decrease in injuries at largefirms as compared to small firms, but other analysts have been unable to confirmthis result. A study by Worrall and Butler (1988) revealed that reported injuriesdeclined more at large firms than small ones when compensation costs increased. By comparison, Ruser (1991, 1985) found that higher benefits led to higherrates of nonfatal injuries at large and small firms, but that these effects weresmaller for larger firms. Ruser considers this result as evidence that experiencerating does matter, and that it counteracts other incentives for increased injuries. Another study by Ruser (1993) found an experience rating impact for injuries,but not for fatalities. Chelius and Smith (1993, 1983) were unable to verify anexperience rating effect.
Employers will not invest in safety or health improvements if there are lowercost methods to avoid compensation payments. The literature suggests thatemployers may have two such options.
First, Spieler (1994) and Ison (1986) specify a number methods by whichemployers can discourage employees from filing claims, or if claims are filed, fromprevailing. Employers can pressure employees not to file claims, delay thecompletion of necessary paperwork, aggressively contest claims, and persuadeemployees who file claims to return to work prematurely.
Second, as Spieler (1994) documents, employers have reacted to highercompensation costs by engaging in political activity to reduce future paymentsto workers. In response, states have reduced the level of benefits for sometypes of injuries, made other types of injuries noncompensable, limited allowablemedical costs, capped physician fees, adopted administrative changes to makeit easier to discontinue benefits to workers, and reduced lawyers' fees. At thesame time, however, states have also adopted various types of injury preventionand safety incentives or requirements. The literature does not indicate whetherthe net effect of these two types of actions has been to reduce or increase theincentive of employers to take safety precautions. The impact may vary fromstate to state depending, among other factors, on the relative political strengthof employers and organized labor.
Spieler also hypothesizes that employers may seek to reduce workers'compensation payments by methods other than safety improvements becausethey "often perceive themselves as having less influence over the occurrenceof injuries than they in fact have." More generally, Veljanovski (1982)demonstrates that compensation systems will not produce optimal results underconditions when employers, as well as workers, have imperfect and asymmetricalinformation.
Analysts debate whether the cost of workers' compensation creates an incentivefor employers to reduce workplace accidents and illnesses. Even if it is assumedthat such an incentive exists, spending on accident and illness prevention willnot be optimal unless employers compensate employees for inadequacies in exante compensation. The evidence suggests however, that workers'compensation does not reimburse workers for the costs of an injury or illnessnot covered by wage premiums.
Spieler (1994), Boden (1995) and Schroeder and Shapiro (1984) establish that thestates have established damage caps and other limitations that significantlyrestrict workers' compensation for accidents. In most states, the level ofcompensation varies inversely with the seriousness of an injury. Compensationfor temporary disabilities is controlled by statutory prescribed formulas that limitcompensation to less than the direct wage losses of better paid employees. Compensation for permanent partial disability payments often does not equal thetotal wage loss of any employee. Compensation for fatalities is often less thanfor temporary and permanent disabilities. Furthermore, workers' compensationdoes not include in damage calculations the loss of fringe benefits ornonpecuniary losses to workers and their families.
Moreover, employers pay very little compensation for workplace-inducedillness. Statistics cited by Weiler (1986) indicate that states compensate only 250cancer cases per year as compared to the thousands of cancer fatalities that maybe work related. Government studies cited in Schroeder and Shapiro (1984)indicate that only 2-3 percent of all workers' compensation payments are foroccupational disease.
Schroeder and Shapiro and Barth (1984) hypothesize that several factorsexplain this low compensation rate. Workers and their physicians often fail torecognize that many illness are work-related. Moreover, employers are oftensuccessful in contesting those claims which are filed because of the difficulty ofproving causation and because many states have restrictive standards forrecovery. The few disease victims that do prevail face the same statutorylimitations on compensation amounts that apply to injury victims.
Even if more workers were compensated at higher rates, employers may stilllack a strong economic incentive to invest in health precautions. A manager'sdecision to invest in disease prevention is not based on current compensationexpenses, which result from past actions, but on the likelihood that theinvestment will prevent future illness. Since occupational diseases arefrequently characterized by long latency periods between exposure and diseaseonset, the manager can discount heavily the consequences and spend little ornothing on prevention. The manager's decision to discount the costs of futureillnesses may accurately reflect the current costs to the employer of futureillnesses. A manager, however, may be tempted to discount the cost of futureillnesses for another reason: any consequences for employer will occur longafter the manager has retired. Moreover, managers know that many workers will
change jobs during the long latency period which frees the employer frompaying compensation when the worker becomes ill.
Few workers can seek additional compensation in a tort suit. Workers'compensation laws in the United States almost always prohibit an employee fromsuing an employer for a tort remedy.
As a result, a worker can seek a tort remedy only if some third party isresponsible for an accident or illness. Viscusi (1991, 1989) reports that productliability claims for work-related injuries constitute about 13 percent of all productliability claims. After a detailed analysis of such law suits, he concludes thatboth workers' compensation and tort liability have "important" roles to play andthat further research is necessary to understand the relationships of the tworemedies. Boden and Jones (1987) found that the product liability compensationin asbestos cases "may" provide substantial incentives for manufacturers towarn of future hazards, but that workers' compensation provided "extremely" lowincentives for the control of asbestos.
Schroeder and Shapiro (1984) believe few workers are likely to receive tortcompensation for occupational illnesses. They list the array of legal hurdles thatsuch workers must overcome. Moreover, Wiggins and Ringley (1992)demonstrate that bankruptcy can be a viable shield from compensationpayments in cases involving long-term hazards.
The government, as Phillips (1976) discusses, has three options to increase thefinancial incentive of employers to make safety and health improvements. First,it can require employers to pay higher amounts of workers' compensation. Second, it can require insurance companies to base rates to a greater extent onthe actual accident experience of employers. Finally, the government can imposta tax on employers that would reflect the costs associated with workplaceaccidents and illnesses. This last option is discussed in the next section.
An increase in workers' compensation payments should stimulate greaterinvestment by employers in safety and health precautions, but an earlierdiscussion indicated that employers may not react in this manner. Moreover,there are significant practical and legal hurdles to adopting this reform in theUnited States. An increase in compensation would require action by fifty statesand overcoming the opposition of employers who could expect to pay higherinsurance costs.
Greater reliance on experience rating should encourage employers toimprove workplace safety and health because an employer's insurance costswould be more closely tied to the firm's actual safety and health record. Phillips(1976) discusses Ontario's experience with a "penalty" rating system that isintended to increase experience rating by insurance companies. Spieler (1994) explains that insurance companies in the United States have fought attempts toincrease experience rating because it increases their costs. Governmentalattempts to impose experience rating will therefore draw the political oppositionof both insurance companies and high injury rate employers. Low injury rateemployers, however, may support such changes.
The previous reforms would improve how workers' compensation functionsto reduce workplace accidents. Most analysts agree with Lave (1983), however,that it "seems inconceivable" that workers's compensation can be reformed tohandle occupational disease. Dewees and Daniels (1988) discuss the difficultiesof designing a system that addresses the constraints, discussed earlier, whichimpair disease compensation.
Instead of reforming workers' compensation, many analysts have expressedinterest in imposing injury and illness taxes. Analysts recommending impositionof an injury tax include Sunstein (1990), Sider (1984), Rubin (1984), Mendeloff(1980), Nichols and Zeckhauser (1977)and Smith (1976, 1974). Employers can beexpected to oppose vigorously a new tax. This may explain why so fewgovernments have tried this approach despite its theoretical attractiveness.
An injury tax would have several advantages. It would create an additionalincentive for employers to reduce workplace accidents and illnesses. Further,the amount that an employer would pay would be a function of its safety record. Thus, unlike workers' compensation, an employer's incentive to take safetyprecautions is not diluted because of the impact of insurance. As explainedearlier, the cost of workers' compensation insurance for many firms does notreflect, or does not fully reflect, their safety record. Finally, as compared toOSHA regulation, a tax is a more efficient method by which to reduce workplacerisks. Under OSHA regulation, all employers must comply with the level ofsafety that OSHA specifies regardless of the cost of compliance. Under a taxapproach, an employer would have the option of paying the tax if it was lessexpensive that the cost of abatement of a hazard.
Shapiro and McGarity (1991) dispute that a tax would necessarily be moreefficient than regulation. First, they contend that OSHA regulation is not asinefficient as the agency's critics believe. They note that OSHA relies onperformance standards, which permit an employer to choose the method ofcompliance, and on variances, which give employers with high costs additionaltime for compliance. Second, they predict that employers are likely to engage inthe same types of tax avoidance as they now practice concerning other taxes.
A tax approach can also be used for occupational disease, but calculationof an appropriate tax rate might not be possible. Dewees and Daniels (1988)caution that the determination of an appropriate exposure charge would bedifficult because it would require information that is not readily available. Anexposure charge based on health effects requires knowledge of a quantifiabledose-response function, which measures the number of workers likely to becomeill at different levels of exposure. Dose-response estimates, however, are notavailable for most chemicals, and the estimates that are available often vary byseveral orders of magnitude. Barth (1984) and Viscusi (1984) would avoid thisproblem by financing compensation for employees with a broad-based tax leviedon their employers. This approach, however, would not generate appropriateincentives for illness avoidance, because the tax would not be based on extentto which individual firms exposed workers to dangerous chemicals.
Labor markets and compensation of injured and ill workers create financialincentives for employers to take safety and health precautions. Regulationoffers a more direct means to accomplish the same result.
Most of the literature on regulation addresses OSHA regulation in theUnited States. OSHA's mandate is to "assure so far as possible every workingman and woman in the Nation safe and healthful working conditions." The OSHAct requires employers to comply with safety and health regulations, or"standards," promulgated by OSHA. OSHA is authorized to inspect employersfor potential violations and to assess civil penalties if violations are found. OSHA may also seek criminal penalties in limited circumstances if an employeehas been killed.
McGarity and Shapiro (1993) and Mendeloff (1988, 1980) generallysummarize and evaluate OSHA's role in promoting workplace safety and health. Wilson (1985) and Kelman (1981) compare OSHA regulation to regulation inGreat Britain and Sweden respectively. Lanoie (1992a, 1992b) has analyzed theimpact of occupational safety and health regulation in Canada.
An employer will make safety and health improvements until the cost of theseprecautions is more than the cost of paying additional wages, workers'compensation premiums (if experience rated), and other related costs. If,however, such financial incentives fail, employers will underinvest in safety andhealth improvements. Such incentives can fail for the reasons discussed earlier,including the inability of workers to obtain full compensation for their injuriesand illnesses from wage premiums and workers' compensation.
Regulators can address this shortfall by ordering employers to undertakesafety and health precautions improvements up to the point where the costs ofsuch improvements exceed their benefits. If benefits are measured as the valueof the improvements to workers, administrative regulation will produce about thesame level of investment in safety and health precautions as fully effectivefinancial incentives. In other words, the government would order the same levelof protection as would be produced if employers fully compensated workers fortheir injuries and illnesses.
Although economic theory favors the use of such a cost-benefit approach,Congress has chosen another standard to control health and safety regulationin the United States. This standard requires OSHA to seek the level ofprotection for workers which is available from the "best-available technology"(BAT). Once OSHA establishes that a workplace hazard is a "significant risk,"it must order an employer to reduce that risk to the extent that is "feasible." Astandard is feasible when it is technologically achievable and when employerscan afford the cost of implementing it. A standard is not economically infeasiblebecause it is financial burdensome or even because it threatens the survival ofsome firms in an industry. As discussed below, many analysts favor replacingthis technology-based approach with a cost-benefit standard.
Analysts have attempted to confirm that OSHA's activities have led to animprovement in workplace safety. They have isolated OSHA's impact on fatalityand injury rates in three types of studies. All three efforts have producedinconsistent results.
Some studies have projected the trend of pre-OSHA injury rates andcompared the projected results with the actual results. Smith (1976) compared theactual injury rates in several high-hazard industries that OSHA had targeted forenforcement with projected injury rates. The comparison revealed that actualrates were not significantly lower than projected rates. Mendeloff (1980), bycomparison, found that the actual rates were significantly lower than theprojected rates for several individual types of injuries in California. His study,however, found that OSHA had no impact on the aggregate injury rate forCalifornia and the nation. Curington (1986) likewise had mixed results. Thefrequency rate for all injuries in manufacturing industries in New York was nolower than the projected rate for such injuries, but there were reductions ininjuries resulting from being struck by a machine (43.6 percent) and in theseverity of all injuries (13.2 percent).
Other studies have tested the correlation between aggregate industry levelinjury rates and OSHA inspection activity. For example, when Viscusi (1992)tested whether injury rates were affected by the frequency of OSHA inspectionsand penalties, he found that OSHA caused a 1.5 to 3.6 percent decrease in thelost workday rate. The "lost workday rate" measures the number of days ofwork that an employee misses after an injury. Viscusi indicates that earlierstudies by himself and others found no measurable correlation between thenumber of OSHA inspections and injury rates.
Finally, some studies have sought a correlation between individual plantlevel injury data and an employer's inspection experience. Gray and Scholz(1993) found that an inspection imposing a penalty reduced injuries by 22percent and lost workdays by 20 percent in the following three years. Using thesame methodology, Cooke and Gautschi (1981), Robertson and Keeve (1983),and Scholz and Gray (1990) found similar impacts, but Smith (1979), McCaffrey(1983), and Ruser and Smith (1991) found no association using a different testingtechnique.
Other analysts have measured the relationship between OSHA inspectionactivity and compliance with OSHA safety regulations. Gray and Jones (1991a),for example, found a significant relationship between OSHA enforcement andcompliance at individual plants. Bartel and Thomas (1985) also found thatOSHA enforcement significantly increased compliance (by a total of 26 percentrelative to no enforcement), but they found only a weak link between complianceand injury rates.
Only a few analysts have attempted to confirm that OSHA's activities haveled to an improvement in workplace health. Grey and Jones (1991b) found thatOSHA inspections reduced the exposure of workers to hazardous substancesand increased compliance with health regulations.
20. Evaluation of Empirical Evidence
Bartel and Thomas (1985) explain there are two conflicting explanations for thelack of empirical evidence that OSHA activity results in fewer workplaceaccidents and injuries.
The "inefficacy" explanation proposes that administrative regulation isunable to address many of the causes of workplace accidents. The"noncompliance" explanation proposes that the OSHA lacks the resources toundertake effective enforcement. In addition, Mendeloff (1988) offers a theoryfor the lack of effective regulation of health risks, which is considered in the nextsection.
The "inefficacy" theory posits that administrative regulation does notincrease workplace safety because there is a tenuous link between regulationand the causes of accidents. Administrative regulation focusses on makingworkplace equipment safer to use. Analysts argue, however, that the cause ofmost accidents is a complex interaction of labor, equipment, and workplaceenvironment. In light of this mismatch, Barcow (1980) predicts that OSHA maybe incapable of preventing more than 25 percent of all workplace accidents. Moreover, Rea (1981) hypothesizes that moral hazard may reduce the level ofsafety because workers will attempt to substitute wages for safer jobs.
Bartel and Thomas (1985) ask why Congress has failed to reform, or eveneliminate, OSHA in light of its apparent inefficacy. They observe that OSHAregulations may give large firms a competitive advantage over their smaller rivalsbecause the smaller firms are less able to afford expensive regulations. Theyhypothesize that larger firms support OSHA because the gains from thiscompetitive advantage exceeds the costs of complying with OSHA regulations. Bartel and Thomas (1987) offer empirical evidence that larger firms have such acompetitive advantage concerning OSHA regulations. Fuess and Loewenstein(1990) have similar evidence for coal mine regulation. Their study finds theimposition of expensive engineering controls shifted production to large minesby driving smaller, less safe mines out of business. Hughes, Magat, and Ricks(1986), however, were unable to establish that OSHA's cotton dust standardspermitted large firms to gain in profitability at the expense of smaller producers.
Similarly, Miller (1984) asks whether organized labor is rational in support ofOSHA. He offers some empirical support for the proposition that engineeringcontrols may increase the demand for labor.
The "noncompliance theory" proposes that OSHA lacks the statutory andbudgetary authority to enforce its standards effectively. McGarity and Shapiro(1996) point out that OSHA inspections have had a greater impact on the injuryrates of inspected firms than on aggregate injury rates. They also point out thatthe industries with the most significant decline in injuries and fatalities are theindustries with the highest levels of enforcement. They attribute OSHA's limitedimpact on aggregate injury rates to the fact that the agency's limited resourcesdo not permit it to inspect the vast majority of employers that it regulates.
The previous theories address OSHA's impact on workplace accidents. Mendeloff (1988) attempts to explain OSHA's limited impact on occupationaldisease. He identifies OSHA's mandate as the cause because it requires thestrict regulation of toxic substances. The problem is that such "overregulation"causes "underregulation." Overregulation occurs when the costs of a regulationexceed its benefits. Underregulation occurs when the costs of additionalregulation are less than the benefits. Mendeloff argues that strict regulation oftoxic substances causes less protection of workers than the promulgation ofmore lenient regulations.
Strict regulation protects workers less then more lenient regulations becauseof how employers react to each type of regulation. OSHA has been able topromulgate very few health regulations because employers vigorously resistoverregulation. As a result, OSHA spends inordinate time and resourcesdefending strict standards. Mendeloff proposes that OSHA could successfullypromulgate more standards if it balanced costs and benefits. OSHA would bemore successful because industry would be less likely to challenge more lenientregulations in court, and, if such regulations were challenged, OSHA would bemore likely to prevail. In this manner, workers ultimately would receive moreprotection from a more lenient approach. Although each OSHA regulationwould be less protective of workers, the sum total of protection for workerswould be greater because the agency could promulgate more standards overall.
McGarity and Shapiro (1993) and Shapiro and McGarity (1991) object thatemployers will oppose even lenient regulations. They offer evidence thatemployers gain financial benefits from delaying even modest health and safetyregulations. If the problem is employer intransigence, McGarity and Shapiropropose that Congress change OSHA's statutory mandate to make it easier forOSHA to prevail when it is sued. McGarity and Shapiro (1993) and Shapiro andMcGarity (1989) also propose rulemaking reforms that OSHA can undertake tospeed up rulemaking and make it more rationale. These include improving howOSHA sets its regulatory priorities and focussing on types of regulations thatyield the greatest protection for workers.
Mendeloff proposes that OSHA should balance costs and benefits in healthregulation because employers would be less likely to challenge more lenientregulation in court. Other analysts favor adoption of a cost-benefit standard forOSHA safety and health regulation because this approach is more consistentwith economic theory. Economic theory favors a cost-benefit approach forregulation because it equates the marginal benefits of safety and healthimprovements with the marginal cost of such precautions. Besides Mendeloff,supporters of a cost-benefit approach include Viscusi (1992, 1983) and Sunstein(1996, 1990). More generally, Litan and Nordhaus (1986) propose that Congressestablish a regulatory budget for OSHA and similar agencies which wouldestablish caps for the regulatory costs that the agency could impose.
Arguments that OSHA should be subject to a cost-benefit approach followthe arguments made in general for using cost-benefit analysis to specify theextent of safety, health and other social regulation. Sunstein (1996, 1990) andBreyer (1993) contain a useful statement of the general arguments.
The primary benefit of the cost-benefit analysis is that it addresses safetyand health risks in light of the fact that society will always have limited resourcesto spend on safety and health. Cost-benefit balancing promotes rationality byhelping to ensure that those resources are spent in the most efficient mannerpossible. By comparison, critics find that OSHA regulations often impose coststhat exceed benefits sometimes by hundreds of millions of dollars. For example,Morrall (1979) objects to OSHA's noise regulation because it mandated the useof expensive engineering controls rather than much less expensive personalprotection equipment such as ear plugs. Analysts have made similar criticismsof other workplace safety regulation. French (1988), for example, suggests thatrailroad safety regulation in the United States is inefficient because excessiveburdens are imposed on firms
A second benefit of the cost-benefit approach is that it makes agencies moreaccountable to the public. Safety and health regulation will inevitably requiretradeoffs among regulatory goals because of society's limited resources. Without a cost-benefit approach, the public has difficulty learning about suchtradeoffs. By comparison, a cost-benefit approach requires agencies to makethese tradeoffs more explicit.
A third advantage is that the cost-benefit approach responds to the problemof regulatory "perversity." Critics of regulation, such as Sunstein (1997), warnthat an attempt to reduce one safety or health risk can increase other safety orhealth risks. This would occur, for example, when the regulation of one chemicalleads manufacturers to use more dangerous substitutes. More generally,Sunstein cites to an incipient literature that considers whether costly regulationincreases risks because such regulations reduce wealth. This possibility issuggested by the fact that persons who are unemployed or poor tend to be moreunhealthy and to live shorter lives. Cost-benefit analysis addresses this problemby requiring agencies to examine the "substitution risks" that might result froma proposed regulatory action.
McGarity and Shapiro (1996, 1993) and Shapiro and McGarity (1991) defend thecurrent technology-based approach to regulation. Their arguments, summarizedbelow, follow the arguments made in general by Cranor (1993), McGarity (1991),Sagoff (1988) and others against using cost-benefit analysis to specify the extentof safety, health, environmental, and other social regulation.
One criticism is that cost-benefit analysis is too unreliable to constitute aneffective method to implement regulations. Critics point out that current riskassessment techniques do not have the power to permit precise calculations ofthe number of lives saved or injuries avoided, and that methods used to reducethese benefits to dollars amounts are highly contestable. As a result, the cost-benefit approach ordinarily raises difficult methodological issues that areexceedingly expensive and time-consuming for agencies to resolve and defendin court. In comparison, a technology-based approach more simply setsindustry-wide limitations on the basis of the level of precaution that the bestperformers in the industry are capable of achieving.
Supporters of a technology-based approach also deny that it leads to thetype of regulatory excesses identified by the supporters of the cost-benefitapproach. As just noted, estimates of costs and benefits are highly imprecise. In light of this imprecision, critics of a cost-benefit approach are skepticalregarding claims that the cost of OSHA regulation greatly exceeds the
A second criticism is that the cost-benefit approach is at its core"incoherent" because it cannot yield a single numerical value. According to thisargument, the general tendency of individuals to buy and sell goods for roughlythe same price (the market price) does not apply when credible risks to healthand safety are being traded. Instead, individuals are normally willing to sell theright to be free from increased mortality risks for considerable more money thanthey are willing to pay to reduce such risks. The reason is that most persons candemand more in a bargain in which they are asked to sacrifice something of greatvalue, to which they have a right, than they can afford to pay for that samething, if someone else has the right to take it from them. Thus, use of a"willingness to sell" measure of the benefits of a safety or health regulationyields a different, and higher, value than use of a "willingness to buy" measureof such benefits.
Despite this incoherence, regulators must rely on a "willingness to buy"measurement because it is the only one for which there are data. Estimates ofwage premiums indicate how much workers are willing to pay for a saferworkplace. When workers seek safer jobs, they will forfeit the wage premiumspaid for riskier work.
Critics also argue that reliance on a "willingness to buy" measurement of thevalue of human life is ethically objectionable. This argument contends that poorpeople are not likely to sell the right to be safe for any less than a rich personwould. By comparison, a person's wealth will affect the amount that he or shecan pay to purchase the right to be safe.
A fourth criticism is that discounting future benefits to present value biasesthe cost-benefit approach against the prevention of occupational disease. Although employers must immediate pay for prevention, the benefits of suchactions will not show up for years. The latency period for occupational diseaseis usually twenty or thirty years. As a result, the benefits of a regulation thatwould prevent such losses can be outweighed by even modest present costs.
Supporters of a cost-benefit standard defend the use of a discount rate. They argue that if workers had the opportunity to spend money on preventiontoday, which would result in lower wages, in return for a lower probability ofcancer thirty years later, the workers themselves could likely discount the futurecosts of the disease. In other words, individuals put different values on dyingthirty years from now and dying today. Defenders also dispute that the use ofdiscounting results in a lack of appropriate regulation. They assert that aninvestment in abatement should earn a sufficiently large return over thirty yearsto justify the protection of workers. When this is not true, evaluators shouldverify that they are using an appropriate discount rate.
Finally, critics charge use of a cost-benefit standard as the primary decisioncriterion effectively elevates economic efficiency to a "meta-value" that trumpsall other conflicting values. OSHA's mandate, which reflects both economic andnoneconomic considerations, rejects the idea that the maximization of materialwealth is the only goal of a good society. Instead, it seeks to balance"efficiency," "fairness," and other important social values.
24. Reform of Enforcement
An earlier discussion explained that empirical studies suggest OSHA inspectionactivity has not lead to a reduction in aggregate injury rates. One explanationis that many causes of workplace accidents cannot be addressed by safetyregulations. Another explanation is that OSHA has insufficient resources toexpand its successful enforcement efforts at some plants to most employers. The literature on enforcement focusses on how OSHA can promote greatercompliance in light of its limited resources.
Viscusi (1986, p.127-150; 1986, p.234-268) analyzes this issue in terms of anemployer's economic incentives to comply with OSHA regulations. Employerswill comply when it cost less to make safety improvements than to risk anadverse OSHA inspection. The risk to an employer of an inspection is afunction of the likelihood that the firm will be inspected and the penalties thatthe firm will suffer if violations are detected. These penalties include OSHAfines as well as any adverse effect on the employer's reputation. If theemployer's reputation is adversely affected, there may be worker turnover,increased demands for wage premiums, or other adverse consequences.
In light of these incentives, Viscusi proposes that OSHA can improvecompliance by increasing the likelihood that the most dangerous workplaces areinspected and that large fines are assessed for serious violations. McGarity andShapiro (1993) support these recommendations and amplify how they might beimplemented.
OSHA can increase the likelihood that it will find the most dangerous workconditions by focussing its inspection activity on the most dangerousemployers and its individual inspections on identifying the most seriousviolations. Analysts, such as Howard (1994) and Bardach and Kagan (1982),have criticized OSHA for zealously enforcing detailed rules in circumstanceswhere enforcement is counterproductive, unfair, or even nonsensical. OSHA,however, has a potential problem in using injury records to target inspections.Ruser and Smith (1988) show that using injury records to target inspectionscreates an incentive for employers to underreport injuries in high-hazardindustries. If OSHA uses such records for purposes of targeting, it must auditemployers to reduce underreporting.
Fry and Lee (1989) propose that the "real teeth" of OSHA citations may bethe impact on the stock market value of a firm. They found that theannouncement of fines produce an immediate and pronounced decline in thevalue of the firm subject to the penalties. They hypothesize the decline mayreflect the additional costs a firm can expect such as the need to make safetyimprovements.
Regulators might also enhance compliance with regulations by mandatingthat employers establish joint employer-employee health and safety committeesto monitor workplace conditions. Such committees may improve safety byfocussing the attention of employers and employees on workplace hazards, andby providing a forum for the exchange of information. These committees mightbe especially effective in the absence of a union to give workers a voiceconcerning safety issues. Spieler (1994) documents that a number of states haveinstituted such a requirement. Rea (1983) discusses Canadian laws which requiresuch committees. He notes that because joint safety committees were alreadyin existence in larger unionized establishments, the main impact of the legislationis to extend the practice to small firms and nonunionized work places. Waltersand Haines (1988) found, however, that workers in Ontario had only weak linkswith their health and safety representatives, and few workers made use of thisresource.
An employer will invest in safety and health precautions until the cost is morethan the expense of paying higher wages, workers' compensation, and otheraccident and illness costs. Employees receive additional protection becausegovernments have chosen to augment these financial incentives with regulation. Economic theory would have governments order the same level of protection aswould be produced if employers fully compensated workers for their injuries andillnesses and paid any additional accident and illness costs. In the UnitedStates, however, Congress has established a technology-based goal for OSHA,which requires the agency to seek the highest level of protection which istechnologically feasible.
Analysts have studied the impact of compensatory wages, workers'compensation, and regulation on safety and health. These studies indicate thatall three approaches promote investments in safety and health protection, butthe extent of such improvement is difficult to verify and may be limited innumerous situations. There are various explanations for this lack of efficacy,some of which conflict, but all of which suggest that labor markets,compensation, and regulation are impeded by significant constraints.
Various reforms have been proposed to address these constraints, but theliterature has not reached a consensus concerning some key proposals. Inparticular, there is a considerable debate concerning whether OSHA should besubject to a cost-benefit test. There is also a question of political viabilityconcerning some reforms. In the United States, for example, reform of workers'compensation requires action by all fifty states.
This analysis confirms that labor markets, compensation, and regulation arehighly imperfect alternatives concerning the reduction of occupational accidentsand illnesses. It also suggests that it is necessary to rely on all threeapproaches. Each approach alone, even if reformed, is unlikely to produce anappropriate level of occupational safety and health. The combination of thethree, by comparison, is more likely to move countries closer to this elusive goal.
Professor Shapiro gratefully acknowledges the highly useful comments of twoanonymous reviewers.
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© Copyright 1998 Sidney A. Shapiro