Three Preliminary Papers on the Economics of Occupational Safety and Healthby Peter Dorman
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In Chapter 1 we saw that a large portion--perhaps most--of the costs of on-the-job injuries and illnesses are external to the employer. Workers, their families, and their communities bear these costs, but they do not enter into the ordinary profit-and-loss calculation of enterprises. If employers decide what safety and health conditions they will provide strictly on the basis of profit, and if there is no intervention by public policy, workplaces will be too dangerous.
This point is illustrated in Figure 1. On the horizontal axis we measure the level of safety in the workplace going from left to right; at the origin jobs are very dangerous, while at the right end of the diagram jobs are perfectly safe. The vertical axis measures costs, both the costs of injuries and illnesses and the costs of preventing them.
Figure 1
Accident Costs, Prevention Costs, and Safety Levels
Suppose an "average" accident or disease has a certain total cost, measured as C1. We can assume that this cost is constant whatever the level of safety or risk, resulting in a perfectly horizontal marginal cost curve. This curve tells us that the first harm suffered by a worker results in a cost of C1, the second likewise, and so on up to the point at which the job is so safe no one gets hurt any more. Thus, the vertical height of this line measures the (constant) incremental cost of safety and health problems. We can assume it measures all the relevant costs no matter who absorbs them--whether they are disruptions to production, medical costs, lost work time, burdens placed on family life, or the pain and inconvenience directly suffered by the worker.
Yet we have already established that many of these costs are externalized; they do not fall on the employer. A lower cost, C2, represents only that portion of total cost that the employer pays for. This would include damage to materials, lost worktime, hazard pay, and possible negative effects on morale and work rhythms. While substantial, these are necessarily less than the total costs, external and internal. The difference, C1 - C2, measures the extent of cost externalization. As with the combined cost, the external cost is assumed to be constant over the range of workplace risk.
The third curve in Figure 1 represents the cost of eliminating a particular risk in the workplace. Here we assume that this cost increases as the job is made safer. After all, when no attention at all has been given to safety and health, it is often possible to find simple, inexpensive improvements. When all the obvious problems have been addressed, however, further improvements are like to come at a stiffer cost. Indeed, as jobs become extremely safe, meeting still higher standards becomes a difficult task. Hence the curve slopes upward, displaying rising costs as more preventive measures are implemented. (In many cases it is possible to avoid high safety costs by switching to a new technology, as Chapter 3 demonstrates.)
As long as the cost of preventing an injury is less than the cost of incurring it, logic dictates that the protection is justified--but whose costs are being counted? If it is the full social cost, C1, then safety should be targeted at S1, since here there is neither too little safety or (in cost terms) too much. Yet, left to their own interests, firms will target S2. This gap can be very large. One indication of its potential size is the minimal level of protection found in countries that do not have a functioning safety and health program. If we believe that firms are actually maximizing their profits when they permit high levels of industrial accidents and disease, then the extent of cost externalization, C1 - C2, must be very great.
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While analytical devices like the curves in Figure 1 can help illustrate the nature of the problem, they provide a weak basis for identifying the exactly "right" level of safety, if such a level actually exists. This is because it is technically difficult or even impossible to estimate such curves, and because they require making assumptions that are unlikely to be true. The main problems are these:
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Figure 1 offers a different perspective on the problem of unsafe working conditions than one based primarily on the particulars of the working environment itself. From the viewpoint of safety engineering and industrial hygiene, the factors responsible for disablement and death on the job include poorly maintained equipment, inadequate training, exposure to harmful substances, and so on. The indicated response would be either voluntary assistance or mandatory directives to correct these conditions. The analysis in Figure 1, however, points to a different, less proximate cause: the externalization of cost. From this perspective, the logical corrective would be a set of policies that impose the full burden of costs, C1 rather than C2, on those responsible for determining the work environment--sometimes referred to as the "employer pays" principle. The expectation would be that, spurred by the desire to avoid these costs, employers would upgrade working conditions--maintaining the equipment, conducting the training, and containing or replacing the dangerous chemicals that are the more direct cause of injury and illness.
This approach permits a simple definition of the economic incentives strategy for promoting occupational safety and health: it is comprised of policies that internalize the costs of dangerous working conditions, so that a greater share is paid by the employer. Indeed, economic incentives could be used to impose a cost greater than C1 if it is felt that a higher level of safety is needed. The chain of reasoning is that (1) employers seek to minimize costs of production; (2) public policies can make workers' injuries and illnesses on the job more costly to employers; and (3) employers will respond by taking the direct steps necessary to reduce risks to their workers. Economic incentives therefore stand in contrast to both regulation and self-regulation strategies, which focus on step (3) rather than step (2).
Many different types of policies can promote cost internalization; these include the payment of higher hazard wages to workers at risk, making employers liable to damage claims under the law of torts, linking employers' payments under the workers' compensation system to their safety record, and bringing pressure from consumers and other members of the community to bear on firms that have excessive worker disability and death rates. We will survey practices and proposals in these areas, but first we might want to ask, why use economic incentives at all? Since this approach is at best indirect, compared to the direct approach of focusing on hazardous conditions themselves, why should we pursue it? This question is nearly as old as the industrial revolution itself; ever since the first years of the nineteenth century reformers have debated the merits of direct regulation and the indirect path of taxes and subsidies. In this chapter we will review some of this history, but before beginning it is useful to remind ourselves of the potential advantages of economic incentives, since most OSH policy around the world looks to the force of regulation.
1. Economic incentives are well suited to gain the attention of management. In a world rife with regulations, not all of which are enforced religiously, it is all too easy for firms to ignore those purporting to control the production process. This problem is especially serious in that OSH regulations tend to be detailed and condition-specific. As new conditions call for new regulations the mandates accumulate until only dedicated OSH professionals can keep track of them. Economic incentives have the potential to be more general and less complex, but, above all, they speak the language of business. Managers can readily see the impact that these incentives have on measures of enterprise performance, and they can respond to them as they would any other source of costs or benefits.
2. Economic incentives have the potential to operate from the bottom of the safety and health scale to the top: each remaining OSH risk can command its own corresponding incentive regardless of how high the firm's past level of performance. This is in stark contrast to most regulation, which specifies a minimum performance level for compliance. Once that minimum is attained, the regulation is satisfied and no further improvement is required.
3. Economic incentives attach easily to new risks as they emerge. By not focusing on the process by which risks are generated but only outcomes, economic incentives apply as readily to new, unfamiliar risks as to old ones. New risks require new regulations, however, and this process is cumbersome, slow, and often politically contested. This advantage of economic incentives over regulation is becoming increasingly important as the pace of technological change picks up.
4. Economic incentives are flexible, permitting firms to find efficient solutions to OSH problems. By basing themselves on outcomes rather than methods, economic approaches encourage problem-solving and innovation, and take greater advantage of local and tacit knowledge. Regulation, by contrast, always faces a tradeoff between its level of specificity, which maximizes control, and its simplicity and generality, which facilitate both administration and compliance. Particularly as management strategies have increasingly emphasized decentralization and rapid response, regulatory mandates have come to be seen as both more disruptive and less effective.
These are not absolute advantages, as we will see. There are important limits as well as strengths to economic incentives; an effective safety and health system will want to use more than one type of tool.
The form and effectiveness of economic incentives depend considerably on the institutions that govern employment and production. Throughout this chapter we are assuming some form of market economy: workers are hired by private employers whose goods are sold in the marketplace. Beyond this simple description any number of variations are possible. The brief survey of incentive systems that follows takes into account the different institutions that have governed developed market economies. As we consider the implications of this survey for the future of OSH policy, we will want to pay special attention to the developing countries whose workers will constitute the great majority of the next century's industrial labor force. At the same time, however, we need to bear in mind that in different institutional contexts economic incentives will take on new forms.
We begin in England more than two centuries ago, where perhaps the earliest form of economic incentives for improved working conditions was hazard pay. Under this arrangement, employers pay workers a higher wage in return for assuming greater risk of injury or illness. Hazard pay has two desirable effects. First, it provides an incentive for employers to increase the level of safety and health, since this will save money in labor costs--hazard pay would no longer have to be paid. Second, it compensates the workers at greatest risk, so that the total rewards of working, both income and risk, are more fairly distributed.
While the provision of hazard pay may be motivated by the employer's feelings of concern or responsibility, the main reason is competitive pressure in the labor market. Where securing an adequate labor supply is difficult, because of a general shortage of labor or a need for specific skills, and where workers can choose between many alternative employments, the need to provide hazard pay will be greatest. In these circumstances, no worker would accept a dangerous job unless more money were paid for it. Adam Smith, writing in The Wealth of Nations, regarded hazard pay as the normal state of affairs in a market economy. Throughout the nineteenth century, British and American law proceeded on the assumption that hazard pay was the norm, and that workers had no legitimate additional claims against employers in the event of injury or death on the job.
Nevertheless, the experience has been that hazard pay is far more the exception than the norm, and that, even when it exists, it frequently provides less than full compensation for the risks incurred by the worker. Statistical studies of the relationship between risk and wages in developed country labor markets provide uneven evidence for hazard pay; indeed, for some categories of workers higher levels of risk are associated with lower wages. (Leigh, 1995; Duncan and Holmlund, 1983; Dorman and Hagstrom, 1998) This situation reminds us of the continuing problem of sweatshops, enterprises that employ the most vulnerable workers, providing them both the lowest pay and the most oppressive working conditions.
There are both economic and cultural reasons why hazard pay is relatively unimportant in most industries. In the first category are factors like chronic unemployment and the dynamics of long-term employment relations; in the second are social norms regarding the types of risk that are acceptable with or without compensation. Thus, many trade union federations are on record as opposing hazard pay in principle. Despite this, hazard pay continues to play a role in certain intrinsically dangerous work, reflected in pay spreads between underground and surface mining, or between construction work at the top and bottom of a scaffolding.
As the doubts about hazard pay increased over the course of the nineteenth century, courts became more likely to rule in favour of injured workers or their estates who filed liability (tort) claims against employers. By the end of the century, British and American judges were explicit in their rejection of the view that workers assume all the risks of their employment upon agreeing to perform it. The result was a series of awards which provided a new form of economic incentives for safety and health. Fearing such claims, employers would be more likely to improve working conditions. In a sense, the liability system provides the same sort of incentives and compensation as hazard pay, with the difference being that hazard pay operates before the injury or illness and liability operates after it.
Nevertheless, there was widespread discontent with reliance on litigation. This approach can be very costly in terms of court expenses and delay, and outcomes are uncertain, fluctuating between spectacular damage awards and none at all to workers and their families. Moreover, employers facing potential litigation will insure themselves, further attenuating any incentives to curtail risks. Risk-based insurance premiums do not rectify this because it is difficult and costly for insurers to inspect and evaluate workplace conditions, higher premiums screen out safer policy-holders (who anticipate fewer claims) and therefore lead to greater claim costs (referred to by insurance economists as the problem of adverse selection), and competition between insurance companies encourages their sales staff to place higher sales levels above more careful screening of purchasers. Together, these factors lead to a tendency for insurance companies in most countries to standardize their rates, and give employers that purchase insurance less incentive to promote occupational safety and health.
Dissatisfaction with hazard pay and employer liability as vehicles for compensating workers at risk gave rise to mandatory public insurance programs. The first such program was introduced in Germany by Bismark in 1884. Observing that a large part of industrial conflict could be traced to disputes over working conditions, Bismark hoped that a system of universal coverage and prompt, equitable satisfaction of claims would promote positive labor relations. Other industrialized countries copied the German model, adapting it to their own national systems, and by the time of the First World War workers' compensation came to be regarded in much of the world as an indispensable component of social policy.
The fundamental principle behind all workers' compensation systems is the replacement of employer liability with a program of guaranteed payments to injured workers or their families. Workers lose the right to make most kinds of liability claims against employers, but they are entitled to awards from a publicly regulated insurance system. Employers finance the system through contributions based on the size of their payroll. The coverage of the system, the level of compensation, the amounted collected from premiums, and procedures for adjudicating disputed cases are determined by public agencies. Thus all workers' compensating systems provide a combination of pure insurance functions and government regulation.
Today, workers' compensation comes in many shapes and sizes. Most industrialized countries have adopted a single, national system, but Canada, Australia, and the United States devolve it to the provincial/state level. In every country possessing this type of program, premiums paid by employers are tied to the risk faced by workers, but the relative roles of industry- or occupation-wide and company-specific risk vary. Some systems automatically adjust industry or occupation-based premiums by up to 50% to reflect above- or below-average company performance; others require firms to apply for an adjustment (if downward) and assume the burden of proving that they deserve to be assessed at a lower rate. In a few jurisdictions the company's individual record is less important. Spain, for example, permits no more than a 10% adjustment to industry-level rates. A different approach is taken by Finland, which permits employers to choose between industry-average rates and rates determined only by their own claim experience--but not to combine them. France uses a complex system of calculations that incorporates a variety of incentives for specific risk-reduction measures. With so much diversity in national approaches, there is considerable opportunity to compare procedures and results, and therefore learn something about the effectiveness of different types of incentive systems. Unfortunately, there has so far been little work in this area.
There are two overriding incentives issues that affect all workers' compensation systems: incentives to workers to avoid accidents and incentives to firms to reduce risks. There is substantial debate on both topics.
1. Workers' incentives. Throughout most of the industrialized world, workers' compensation has become much more expensive. There are three potential explanations: either workers have become more likely to file claims, the number of compensable accidents and illnesses has increased, or the cost per claim has increased. (These factors are not mutually exclusive.) Speaking very generally, since injury rates are falling in most developed countries, the truth must be found in the other two factors. (Dorman, 1997) Concerning claims behaviour, several studies have documented increasing use of the system as procedures and benefits are liberalized. What this result means is hotly disputed. One hypothesis is that increased claims represent a form of fraud. Those in favour of reducing workers' compensation benefits often assume that this is the only plausible interpretation. (Butler and Worrall, 1991; Meyer et al., 1995) The opposite view is that increasing compensation reduces the level of underreported claims--those which, according to the statutes, should be filed but often are not. As we will see shortly, underutilization is a serious problem in workers compensation. Presumably both accounts contribute to a complete explanation--but in what proportions?
The issue of cost per claim has two main elements. The first is the change in the mix of claims in the direction of more expensive ones. For instance, in most developed countries there has been a shift away from more readily treatable cases like lacerations to chronic, more expensive ones like repetitive stress injuries. Second, medical treatment has itself become more sophisticated and costly; in this sense, the rise of workers' compensation costs is related to the general rise in medical costs as a percentage of the total economy.
Combining these two factors, we can confidently predict that compensation costs will continue to have a major economic impact on enterprises and whole societies for many years to come. Increasingly, people are coming to demand a higher standard of physical health, and the medical correctives to industrial injury and illness are becoming more elaborate and expensive. The only satisfactory solution is a dramatically increased commitment to redesigning work, so that prevention replaces repair.
2. On the employer's side, there is mixed evidence for the effectiveness of workers' compensation. Surveys in several OECD countries have asked management officials whether the premiums they have to pay motivates them to spend resources on improved safety and health; typically the answer is yes. Statistical analysis of premium levels, the degree of firm-level premium rating, and measured safety and health outcomes have been inconsistent, however. Some studies find a small incentive effect, others none. No study has demonstrated an effect large enough to establish workers' compensation as a central safety and health promotion mechanism.
There are several factors that can help explain these results. (1) Only the measurable economic costs of injury and disease are compensated, but these constitute only a portion of the full costs. (2) It is difficult to incorporate occupational illnesses, due to problems of identification and attribution. In the U.S. it has been estimated that a fatal occupational disease has only one-hundredth the likelihood of being compensated, compared to a fatal injury--and fatal diseases are approximately ten times as numerous. (Leigh et al., 1996) (3) Only a part of the worker's lost income is compensated, in order to preserve reasonable incentives. (4) Experience rating is limited, as we saw above. This is particularly the case for SME's due to their large changes in year-to-year experience, yet these firms tend to have the highest injury rates. (5) Firms may respond to workers' compensation incentives not by reducing risks, but by taking other measures to reduce claims. These can include misreporting of accidents or payroll, prematurely returning injured workers to work, and penalizing those who file. (Hopkins, 1995)
The problem of worker underreporting requires further mention, since it bears on the core compensation function of workers' compensation as well as its incentive function. Unlike most regulatory programs, workers' compensation usually places the burden of initiating action on the worker, not the administering agency. If workers do not file compensation does not occur. The result is that the number of compensable occupational safety and health incidents usually exceeds the number of claims, often by a substantial margin. Leigh et al., for instance, estimate that more than half of the fatal occupational injuries that should be compensated in the U.S. are not, and several studies are cited demonstrating similar results for nonfatal injuries that meet workers' compensation guidelines. The rate of noncompensation is even higher for school-age workers. This evidence points to an important tradeoff in workers' compensation: greater levels of experience-rating, intended to apply OSH incentives to employers, may well lead to pressures resulting in a lower rate of compensation. This should not be forgotten when reforms are proposed to workers' compensation rating systems.
In recent years a wide range of reforms have been introduced in the industrialized countries. While they vary in their specifics, most straddle the boundary between incentives and direct worker protection. Some do this by linking incentive systems to safety and health regulation; in other cases the link is indirect or only potential.
One of the newest innovations is also one of the oldest, injury taxes. The English public health reformer Edwin Chadwick proposed a system of injury taxes more than a century and a half ago. The idea never took root during his lifetime and was all but forgotten until it re-emerged during the 1980's. Economists in particular tend to see the injury tax as the most straightforward approach to establishing proper incentives, since it does not need to fit the constraints of an insurance system like workers' compensation. Taxes for specific types of injuries can be set at any level that may be appropriate for incentive purposes. Money collected from these taxes can be used to indemnify workers or to support research and regulation in occupational safety and health.
Interestingly, the tax approach is reappearing almost by accident. Budgets for public OSH agencies have been cut in several countries, resulting in fewer random inspections. These agencies have responded by making inspections primarily after major accidents have been reported. If they find that violations of law were involved--as they usually are--fines proportional to the seriousness of the outcomes are levied. Thus, without conscious intent, these OSH systems are gravitating away from the regulation of conditions and practices and toward the imposition of taxes.
Arrived at in this way, the programs are less than ideal. Often the fines are well below the level of full cost internalization, and their use is largely ad hoc in response to publicity or political pressure. There is a general unwillingness to issue fines against SME's, since that might put them out of business. Moreover, taxes and penalties tend to be applied more regularly to injuries than illnesses, due to the problems of identification and attribution. All of this is in addition to the intrinsic shortcoming that penalty systems are activated only after workers have been harmed, not before when preventive action might be taken. Nevertheless, the fact that agencies charged with regulation are also responsible for issuing penalties offers some potential for improvement. For instance, regulators could apply penalty multipliers to firms that are found to be falsifying workers' compensation records or pressuring workers not to file, or they could permit firms to offset a portion of their penalties through additional expenditures on safety and health monitoring and intervention.
This is also a time of renewed interest in reforms to workers' compensation. One that holds out immediate promise is extending experience-rating to SME's by pooling them into small groups, as in the Netherlands. This can lead to the creation of a "responsibility system" under which each enterprise in the group monitors the others in order to keep shared costs down. Participants may also be assisted in setting up common OSH resources, so that they can enjoy the same economies of scale in this field that the large firms already have. In principle, this approach could be applied down to the level of microenterprises.
Rating principles are also being rethought. Reacting to the disappointing response to experience rating, some jurisdictions have begun experimenting with other approaches. One leader in this area is the province of Ontario, which uses a system of penalty ratings. Thus, heavy penalties are imposed on companies with poor records, but if the company takes remedial actions specified by the authorities the penalty will not be collected. The penalty may also be set aside if the company offers a reasonable explanation for its record. Otherwise, targeted firms will be charged an extra 100% of their premium in the first penalty year, and a further 25% in each succeeding year, until sufficient improvement has taken place or a ceiling of 200% is reached.
The philosophy behind this scheme is that employers cannot be induced to do much about safety under a system of rewards and punishments unless the punishments are sufficiently heavy to make an impact. In this respect penalty rating has a strong advantage over experience rating. Thus far the evidence supports the philosophy; both the average number of accidents and the cost of accidents decrease substantially after a penalty is assessed. (Leigh, 1997)
Germany, the pioneer in workers' compensation, has evolved a system that integrates insurance and intervention. OSH professionals work with firms with high claims records, helping them bring their costs down. The system includes a "Humanisierung der Arbeit" (humanization of work) program which subsidizes the development of OSH-friendly production systems. The agency helps individual companies implement these technologies and in general rewards them through lower premiums for investments or innovations that reduce risk beyond that required by law--new processes, extra safeguards for equipment, establishment of safety circles, etc. During the period in which this program has been in operation Germany has witnessed a steady, substantial decline in recorded occupational injuries and illnesses. (Coenen and Meffert, 1996)
Many of these elements have been brought together in a recent proposal by the European Foundation for the Improvement of Living and Working Conditions (1994). This group began with the political constraint that no firm currently in the market should face a greater cost of operation as a result of any reforms, provided its operations are within the law; this eliminated the possibility of penalties or upward premium adjustments due to experience rating. The main elements of the proposal are contained in Box 3 below.
Elements of a Proposed Model for Economic Incentives by the European Foundation for the Improvement of Living and Working Conditions
1. Economic incentives should target occupational hazards that are permitted under the law. Illegal activities should be regulated through conventional inspection and prosecution.
2. There should be close collaboration between the administering agency responsible for economic incentives and the regulatory agency that enforces OSH standards.
3. Prior to any reductions, workers' compensation premiums will be based primarily on the firm's industry classification and the occupational classification of the worker. A small portion ("base") will be equalized across the economy and represents the system's overhead costs and the purely random component of risk.
4. Premiums may be reduced to reward firms for safety and health-enhancing efforts in excess of those mandated by law. These apply to the industry, occupation, or base components of the premium depending upon their potential scope--industry-specific, occupation-specific, or general--and can be earned by activities such as technical improvements, extra training and education, or the establishment of safety circles.
5. Extra support services will be provided to SME's, which will be grouped together to make efficient use of this assistance. The costs of this specialized OSH consultancy will be defrayed by the revenues of the compensation system.
6. Loans at concessionary rates would be provided to qualified employers who wish to make investments to achieve higher-than-mandated OSH improvements.
7. A system of voluntary labelling would be established to permit employers with above-average OSH records to publicize this in their marketing.
Source: European Foundation for the Improvement of Living and Working Conditions, 1995
Japan's approach to providing incentives for workplace safety differs noticeably from Europe and North America, and is rooted in that country's distinctive economic institutions. Most Japanese firms, except for small service sector establishments, have ties to outside bodies. They may be organized into keiretsus (mutual aid networks) or linked closely with a particular customer or supplier. They are also likely to be affiliated with a large bank, and, through one or more of these groupings, they are usually tied to government planning agencies as well. The guiding philosophy of Japanese economic regulation is consensus: stakeholders discuss alternatives and arrive at a joint plan of action all can commit to. Social pressure and the desire to enjoy the fruits of cooperation replace bureaucratic and litigious forms of governance, a system sometimes referred to as guided markets. In such an environment, occupational safety and health appears as one additional realm for cooperative planning.
Unions and public opinion often initiate pressure for improvements in the workplace. Taking into account these opinions and the interests of the employers, government agencies set safety targets which become part of the general performance standards companies are expected to meet in return for the support they receive in other aspects of their operations. Government inspections of facilities are undertaken primarily to find opportunities for improvement, and informal consultation between the social partners replaces most forms of direct public control. (Wokutch, 1992)
The main problem with this approach is that the consensus-forming process often gives insufficient attention to the safety and health needs of the workforce. With so many issues at stake, and so many stakeholders to be satisfied, it is easy for OSH to be given short shrift. This helps explain, for example, why there is a continuing struggle in Japan against karoshi, death by overwork. Anti-karoshi groups have formed, but the tragedy continues and there is still a need for changes in company policies and the standards set by Japan's workers' compensation system for approving karoshi claims. (Tabb, 1995)
The Japanese experience underscores the importance of recognizing that, even in less guided market systems, firms have many stakeholders, and there is a large potential role to be played by public opinion. While the public is represented in Japan through consultations with organized groups, in less structured economies the key vehicles will likely be consumer attitudes and the general force of public concern. To mobilize the power of consumers, much attention is now being given to the use of standardized labels to convey information about working conditions, child labor, environmental effects, and other externalized aspects of production. While labelling has become more prominent in the international arena, it has potential for domestic use as well. It may be, in fact, that this will prove to be an important safety and health promotion mechanism for developing countries that cannot afford a more elaborate system of regulation and inspection.
While labels do not have to originate in the public sector, they do require a measure of standardization and enforcement to be effective. First, there have to be consistent, publicly announced criteria for permitting products to carry OSH assurance labels. If these are not widely accepted by the relevant parties, and by consumers as a whole, the label will not be successful. Second, there needs to be an impartial system for certification, so that consumers can trust the label. These tasks can be performed either by government or actors in the private sector, providing that the certification body is not too closely associated with employers or sectional worker interests.
Another source of economic incentives for better working conditions available to economies at all levels of development is the public sector itself. Government is a major purchaser of privately-produced goods and services in all economies, and plays a particularly important role in certain industries with above-average risk of injury or disease, such as construction. The power of procurement can be used to set higher standards for enterprises, for instance by requiring that qualified bidders must be in the upper half of their industry according to a published safety formula. As the level of safety gradually improves, the standard for qualification would rise accordingly. Public funding could be provided to assist firms, particularly SME's, that wish to upgrade their record in order to bid for public contracts. To our knowledge, this approach has not yet been attempted anywhere, although a variety of other performance standards have been used for public procurement.
Because many costs of occupational injuries and illnesses are not internalized, there will be a continuing need for economic incentives programs. As more is learned, these programs will become more effective. We need greater understanding of how firms actually incorporate financial calculations into OSH decision-making, and information is lacking for SME's and the informal sector. An immediate priority should be research in these areas so that the knowledge base for policy reform can be up to the task. In the meantime, however, there is already a rich tradition of trial and error, and it is possible to cull the most effective ideas emerging in different national systems.
The most effective innovations have concerned better targeting of incentives and combining incentive, regulatory, and extension/outreach approaches. Firms are more receptive to outside support when they face the possibility of increased penalties and workers' compensation premiums, and the involvement of regulators can steer firms away from claims management and toward risk reduction. A flexible outlook is important if incentive programs are to reach the SME sector, where many of the most critical OSH risks are concentrated.
Nevertheless, economic incentives will never provide a complete answer to the safety and health needs of the workforce. These incentives can only roughly offset the lack of cost internalization, since a full calculation of the costs of injuries and diseases is impossible. Even the best funded and most competent enforcement staff cannot channel all of the employer's response to incentives in the direction of risk reduction. Many firms, moreover, simply lack the capacity to assign penalties and premiums to their ultimate sources in the workplace or to develop effective hazard prevention strategies. Finally, the concern for safe working conditions can never be reduced to financial calculations; the noneconomic perspectives of workers, public health professionals, and the wider community also have to be taken into account.
In the end, we predict that economic incentives will become more sophisticated and enjoy greater use, but that they will be seen as only one leg of the OSH tripod. There will continue to be key roles for regulation and self-regulation to improve working conditions.
Butler, Richard J., and John D. Worrall. 1991. Claims Reporting and Risk Bearing Moral Hazard in Workers' Compensation. Journal of Risk and Insurance. 58(2): 191-204.
Coenen, Wilfried and Karlheinz Meffert. 1995. The Preventive Approaches of the Statutory Accident Insurance System and Their Effectiveness. International Journal of Occupational Safety And Ergonomics. 2(1).
Dorman, Peter. 1997. Internalizing the Costs of Occupational Injuries and Illnesses: Challenge or Chimera? Presented at the European Conference on the Costs and Benefits of Occupational Safety and Health, the Hague, May. ---- and Paul Hagstrom. 1998. Wage Compensation for Dangerous Work Revisited. Industrial and Labor Relations Review. 52 (1): 116-35.
Duncan, Greg J. and Bertil Holmlund. 1983. Was Adam Smith Right after All? Another Test of the Theory of Compensating Wage Differentials. Journal of Labor Economics. October, I: 366-379.
European Foundation for the Improvement of Living and Working Conditions. 1995. An Innovative Economic Incentive Model for the Improvement of the Working Environment in Europe.----. 1994. Catalogue of Economic Incentive Systems for the Improvement of the Working Environment.
Hopkins, Andrew. 1995. Making Safety Work: Getting Management Commitment to Occupational Safety and Health. Sydney: Allen & Unwin.
Leigh, J. Paul. 1995. Compensating Wages, Value of a Statistical Life, and Inter-industry Differentials. Journal of Environmental Economics and Management. 28(1): 83-97.
Steven Markowitz, Marianne Fahs, Chonggak Shin, and Philip Landrigan. 1996. Costs of Occupational Injuries and Illnesses. NIOSH Report U60/CCU902886.
Meyer, K., W. Kip Viscusi, and D. Durbin. 1995. Workers' Compensation and Injury Duration: Evidence from a Natural Experiment. American Economic Review. 85(2): 322-340.
Tabb, William.. 1995. The Postwar Japanese System: Cultural Economy and Economic Transformation. Oxford University Press.
Wokutch, Richard E. 1992. Worker Protection, Japanese Style: Occupational Safety and Health in the Auto Industry. Ithaca (NY): ILR Press.
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