Three Preliminary Papers on the Economics of Occupational Safety and Healthby Peter Dorman |
How can economic analysis be applied to the goal of creating safe and healthy conditions at work? The following papers consider three broad topics, the calculation of economic costs of accidents and ill health, the use of economic incentives in national occupational safety and health programs, and the extent to which expenditures on working conditions can be treated as investments at the enterprise level. They are being made available in this format to enable anyone interested in these questions to have immediate access.
Here is a short summary of the contents, with links to the actual papers:
There is increasing interest in measuring these costs, but no agreement about what to measure or how. I propose four distinctions: economic vs noneconomic costs (depending on whether they are measurable in economic terms), fixed vs variable costs (depending on whether they vary with the incidence of accidents and diseases), direct vs indirect costs (depending on whether they are routinely known by decision-makers), and internal vs external costs (depending on whether they are paid by the decision-maker or another party). According to economic theory, the costs that financially motivate firms to improve working conditions are economic, variable, direct, and internal. Studies at the enterprise level show that indirect costs can well outweigh direct costs; studies at the national level show that the great majority of economic costs are external to firms. A conservative estimate would be that the full economic cost of occupational injuries and illnesses amounts to 3% of a typical developed country's GDP. Nearly all the economic costs arising in the informal sector and small and medium enterprises is externalized to workers or the community.
The problem of cost externalization is central to the economic analysis of occupational safety and health. If firms respond to economic incentives only, the existence of external costs leads to a lower level of protection than that which would be justified on purely economic grounds by society. Of course, economic motives are not the only ones that enter into the calculation of either enterprises or society, but competitive pressures may enhance their importance. Because of this, and because they are more compatible with efficiency objectives, economic incentives have been a focus of renewed interest among policy-makers. This chapter discusses various instruments designed to internalize the economic costs of hazardous working conditions, such as hazard pay, employer liability in the courts, and workers' compensation. Perhaps the most promising approaches today are those that link protective measures and incentives.
From an economic standpoint, expenditures to improve working conditions are investments; they incur an initial cost in order to produce a flow of future benefits. Experience demonstrates that the value of these investments are usually greater than initially thought, due not only to the intangible and long-run benefits of worker health and well-being, but also to the ability of enterprises to innovate in ways that enhance product quality, reduce waste, and improve working conditions simultaneously. At an economy-wide level, this is an essential component of the development process. Nevertheless, enterprises that would benefit from these investments may still fail to make them, due to potential for competitive disadvantage. This point is demonstrated using the analytical device of the "prisoner's dilemma". In the end, while investments in better working conditions should not be made only on economic grounds, decision-makers are increasingly interested in measuring their net economic costs--the economic cost of preventive activities minus the economic costs avoided by prevention.
*These three chapters were prepared for the World Report on Occupational Safety and Health, which was not released. Please note that they were written in 1997 and have not been updated; the only editing that has been applied has been for the purpose of removing references to other sections of the World Report. Much of this material will be incorporated in a future working paper, which will also reflect information and issues that have emerged in the last three years.
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