Value of a Life:

Compensation and Regulation of Asbestos and other Work Hazards

• Health and safety issues in the workplace are another setting where externalities can arise. Firms can invest in safety for their workers or they can produce at a lower cost. If they don’t take the safety precautions that is an externality in production. See figure on the next slide:

Private vs Social Cost in Workplace Safety

What does a world with externalities look like?

• The government might want to do something about this externality.

• It has a few options– It can regulate industries to impose safety

standards– It can compensate individuals– It can do a mixed strategy, i.e., some

regulation and some compensation for persons effected by low safety standards

• If a government chooses the compensation option then it needs to decide how to value a life or an injury.

• Unfortunately, these prices or values that are not directly observable in the market.

• Generally these are shadow values, although they are not observable they can be inferred from prices that are observable.

• Some examples of government programs that provide compensation– Social insurance programs that compensate workers

for occupational accidents– Social insurance programs that compensate the

families of those killed while working– Setting up special funds to compensate those

exposed to hazardous substances while working, where symptoms of exposure are not seen until well into the future; e.g., Black Lung for coal miners, Asbestosis and Mesothelioma for workers exposed to asbestosis fibers

• The primary focus of this lecture will be asbestos.

• What is Asbestos?– Asbestos is a mineral that has been found to

have very good properties as an insulator and resistance to fire.

– However, health risks have been also found for those exposed to asbestos fibres, which are very dangerous

Asbestosis Fibres on a Rock

Asbestosis Insulation on pipes

• Health Risks of Asbestos fibres– Abestosis fibres can be inhaled and create

scar tissue in the lungs. The scar tissue makes it more difficult to breathe and eventually you can breathe. This disease is called Asbestosis

– Exposure to asbestosis fibres can also cause Mesothlelioma, a cancer of membrane around the lungs. There is no cure, it is 100% fatal.

– A cost-benefit framework can be used to provide insights into these issues.

• Whether to regulate the use of asbestos and if so, how strict are the standard

• How to compensate persons for exposure to asbestos

– A few different approaches can be taken; we’ll consider these alternative options as well as their advantages and disadvantages

Computing Benefits/Payments for Occupational Deaths

• There are a few different approaches that can be used to compute payments or compensation for an occupational (or other reason) death

1. Legal approach:• Used in medical malpractice or wrongful death

litigation• Traditionally, an accounting exercise where a

tribunal is required to determine liability and then determine each separate element of loss and assign a monetary value to each element

• Can sometimes determine two components of loss

• Economic vs Non-Economic loss

• Payments are made in a lumps• Economic losses are determined by figuring

lost earnings capacity of an individual, which requires determining how much a person would’ve earned and also how long they would’ve worked

– How much? • If a person has an established job, relatively easy

to determine; However, it is much more complicated if a person is still getting their education or there is a lot of uncertainty in their earnings (e.g., a self-employed person or someone who has a large variable component to their earnings, i.e., bonuses, profit sharing or commissions

– How Long?• How long would the worker work? When would

they retire? Normal retirement age (65) versus early retirement age (60) or average retirement age (62.5)

– Since these computations are present values, there is also an issue about what the discount rate should be

• In Ontario, they legislate the discount rate.

– Non-Economic Losses• Involves compensation for loss in quality of life or

pain and suffering• Generally, courts in Canada award smaller awards

for non-economic losses than U.S. courts

2. Workers’ Compensation– A no-fault social insurance system for

occupational injuries and diseases, which means you don’t have to show negligence; pays fixed sums

• Here are some examples for Ontario:

Lump Sum Awards, 2013

Age Compensation

Less than 20 $114,805.68

25 $105,238.53

30 $95,671.39

35 $86,104.25

40 $76,537.11

45 $66,969.97

50 $57,402.82

55 $47,835.68

60 or older $38,268.54

Monthly awards, minimum compensation annual for spouse and child is $21,730.28, maximum is $83,200.

Burial amounts, pay for the funeral costs; minimum payment is $2870, no maximum, but will only pay for reasonable expenses.

Some differences across provinces in terms of the amounts they are willing to pay and how large the maximums might be (e.g., maximum payments in Newfoundland and Prince Edward are smaller than those in Ontario)

3. Statistical Value of a Life– This is the economic appraoch– Rests on the following assumption:

• If you work a more dangerous job, then you will want a higher wage to compensate you for the dangers of worker (called a compensating differential), as risk increases so do wages

• If you assume that wages fully compensate workers for the hazards of working then it is possible to use the differences in wages between a “safe” job and a “risky” job;

– A shadow price for the value of a life, can be computed using the differences between the safe and risky job.

– Example• Job #1, the safe job, risk level 0.001 • Job # 2, the risky job, risk level 0.002

Job #1 and #2 are same in every other respect except that the risky job pays $50/week than the safe job

– This implies that a worker in the risky job is willing to accept an extra fatality risk of 0.001 for an extra $2,600 per year (52 weeks x $50 a week)

– Can extrapolate this figure

Extra fatality risk Extra salary required

0.001 $2600 (1 x 2600)

0.002 $5200 (2 x 2600)

0.003 $7800 (3x 2600)

… …

1.00 $2,600,00 (1000x 2600)

– Simple calculation:

Value of Life= Requirement in Extra Salary/Extra Fatality Risk

Value of Life=$2600/0.001=$2,600,000

The statistical value of a life is a shadow value• Generally, economists estimate the value of

a life using regressions of wages on the probability of death as well as explanatory variables for worker and job characteristics

• Estimates from the literature (in US dollars) range from a low end of $600,000 to $16.2 million; most estimates tend to be between $4 and $7 million with a median of about $4.9 million

• Generally, the more variation you have in the measure of risk, the bigger the estimate of the statistical value of a life

• The Statistical Value of a Life tends to be much higher than the compensation provided by workers compensation insurance that was presented earlier.

• Why?

• Workers’ compensation is a no fault insurance system, so there is no process for determining negligence on the part of the worker or employer, which means payments are (relatively) immediate. This sort of trade-off can explain why benefits are much lower than a statistical value of a life.

• The alternative to the no-fault system is a system that proves neglience on the part of employers (i.e., a tort system) in a court of law; these sorts of settlements tend to be in line with a statistical value of a life. However, it very costly and time consuming to go court and there is also a chance the person suing their employer can end up with nothing. So the tradeoff is to get a smaller amount with certainty versus a much larger payment with a smaller probability.

Evaluating Regulations Protecting Workers from Absestos Exposure

• Abestosis exposure has some very serious health risks. Up until the late-1960s was still widely used in industrial and residential settings despite some knowledge of health risks– Industrial uses included using in brakes for

cars and as insulators wrapping steam pipes– Residential uses included mixing it with

plaster and wrapping pipes used for heating and hot water

• In the 1970s governments began to set more regulations on the use of asbestosis and the exposure limits for workers who handled asbestosis.– We’ll consider these regulations from a cost-

benefit framework– Objective is to pick the optimal exposure level

given the costs of reducing worker exposure and the harm that results from exposing workers to asbestosis

• There are a few ways to measure the harm that results from exposure, but both amount to willingness-to-pay measures

• With this measure, qt* is the probability of surviving from period 1 to period t

• r is the discount rate• T is the maximum

life span

• Ut (xt) is the utility of xt at time t

)1(

1

1

1

*

T

ttttt xu

rqEU

• Can simplify this assuming that x and utility are constant over time

• This equation implies that any reduction in the probability of surviving until year t reduces expected utility EU

T

tt

t

r

qxuEU

1

*

1

• Can use this framework to compare two policies on the regulation of workplace risks and hazards.

• The change in regulations should have an effect on the survival probability qt*; so if have two policies i and j with survival probabilities– Policy i implies survival probability qti*– Policy j implies survival probability qtj*

)2(

111 1

**

T

t

T

tt

itt

jt

r

q

r

qxu

• An alternative approach to valuing deaths is to replace the survival probability in equation (1) with the probability of dying in year t, where the probability of dying is denoted as mt* (note the qt*s will be large numbers closer to 1, but the mt*s will be smaller numbers closer to 0); this changes equation (2) which is now expressed as

)3(

111 1

**

T

t

T

tt

jtt

it

r

m

r

mxu

• The mit* and mjt* represent the probability of dying in year under policy i and j

• Equations (2) and (3) are used to compute the cost of saving a life; these figures can then be compared with the value of statistical life which measures the benefit of saving a life.

• The principles of cost-benefit analysis tell us that a project/policy should proceed if the benefits exceed the costs

Do the Benefits of Absestos Regulation Exceed the Costs of

Regulation?• Estimates of equation (2) and (3) have

been undertaken in the empirical literature to determine the costs of asbestos regulation. Consider the following examples:

• Dewees and Daniels (1986) found that reducing exposure levels to asbestos by 75% would produce an estimate of the (2) or (3) of about $35 million

• In the U.S. the Occupational Health and Safety Agency (OHSA) implement much more stringent asbestos regulation in the 1970s, which were estimated to cost about $35.6 million

• In 1986 the OHSA ended up imposing much tougher regulations, these regulations were estimated to cost $114.8 million

• If one where to take the $5 million estimate of the value of a statistical life, then the benefits of a life saved are much less than the costs of a life saved; moreover, the costs of a life saved exceed the benefits of a life saved even when the maximum estimate of the value of a statistical life (about $16 million) is used.

• From an economic perspective it appears that the regulation is excessive, since the costs far exceed the benefits. And the regulations are not consistent with other rules/approaches for regulation in other branches of the U.S. government.– For example, the U.S. Department of Transportion

does not pursue safety measures if their cost is $3 million or more (this assumes that the value of a statistical value of a life is $3 million, which might be a little low).

• The end result of the regulation is that asbestos is no longer really used since it is too expensive to produce anything with it since health and safety standards mean that a lot of care has to be used when producing anything with it. So ended up substituting away from asbestos and using other materials. – If a cost benefit approach was used, instead of just

picking standards, perhaps there still might have been an asbestos industry, although it would probably only have been used in a few products.