« What makes an entrepreneur? | Main | Do we undervalue routine? »
Words of wisdom
This is from Bryan Caplan:
Fun facts from Kip Viscusi's article on "Job Safety" in David Henderson's encyclopedia:
Annual OSHA penalties for safety violations (2002): $149,000,000
Annual Workers Compensation Premiums (2001): $26,000,000,000
Estimated Annual Wage Premiums for Risky Activities (2004 dollars): $245,000,000,000
His point: Market incentives for worker safety dwarf legal incentives, which in turn dwarf regulatory incentives. The level of safety we see in the workplace today is about the same as the level we'd see if government just looked the other way.
Addendum: This picture shows how much OSHA has increased American job safety.
Posted by Tyler Cowen on February 6, 2008 at 06:52 AM in Economics | Permalink
Comments
There are at least a couple of possibilities here
1) OSHA fines are low because regulation is working very well
2) OSHA fines are low because government is just looking the other way
Posted by: richard at Feb 6, 2008 7:09:39 AM
This is substandard. The $245B is an estimate, but let's take it as given. Are you implying that the $26B and $245B estimate would remain unchanged if the OSHA disappeared? I think the most likely event is that those numbers would go down. Where's your law of unintended consequences now?
Posted by: MostlyAPragmatist at Feb 6, 2008 7:37:08 AM
Come on, Tyler, you know better than that.
Paying a fine is an off-equilibrium event in the enforcement game. In fact, if enforcement were 100% effective, then the expected fines in equilibrium would be zero. In contrast, wage premiums are paid in equilibrium and reflect the risks that (still) exist in the job.
Making an inference like Bryan's is just plain bad economics.
Posted by: A student of economics at Feb 6, 2008 7:56:18 AM
Sorry people, but your complaints do not much dent. Relative to the size of what it regulates, OSHA has very limited resources. Employers are not living in terror of it. You might say: "the above data show *jobs are really dangerous*. We need a stronger OSHA!" Maybe. You cannot say "OSHA is the major force making for safe jobs or even close to it." In reality it is a minor force. Keep in mind it is Kip Viscusi who made the inference, and he is arguably the world's leading expert on job safety. Bryan Caplan is just the guy presenting Kip's material.
Posted by: Tyler Cowen at Feb 6, 2008 8:13:32 AM
Would be interesting to see the trend over multiple years (and administrations). OSHA and its mining-oriented counterpart MSHA have at different times complained about having their hands tied both in capability to audit and in the size of the penalties available. The $149M could be from a few fines or many, and it could be drastically more or less for 2002 than for other years.
As for unintended consequences, joint enforcement with the EPA might qualify. OSHA and EPA team up on enforcement partly because EPA can assess much higher fines. The simpler system attempting to regulate the more complex system is adopting more complexity in order to address its disadvantage, something its founding law surely never intended. Not sure if that fits, but an employer with a large fine from EPA might think so, and might in turn act in ways intended and unintended.
Posted by: J.Lo at Feb 6, 2008 8:14:28 AM
I've worked in construction and the trades for a while, and not every site I worked cared about safety. However, outside my current situation, those that did care about safety appeared to do so only for fear of OSHA fines.
Posted by: false_cause at Feb 6, 2008 8:20:17 AM
I think the student is right.
You have to look at what the penalties would be for an equal number of violations as are expected in the market which creates the market wages (market wages of course currently take into account the fines) and compare. You can't look at total violations and fines under the current system and compare those fines to the wage premiums.
If you got rid of the laws and fines, wage premiums would go up, and if you got rid of the wage premiums (by labor changing its attitude, for example), violations and hence fines would go up.
The two are offsetting, but the actual amount paid out can't be compared to see which is having the greater effect. If laws/fines are doing a good job then the amount paid would be relatively low; but if wage premiums are doing a good job, wage "premiums" per worker would be high, but labor demanded would be low. Even if the aggregate numbers move in the same direction, it is a fallacy that they can be compared directly.
Posted by: liberty at Feb 6, 2008 8:20:47 AM
It's true that there are good reasons to expect OSHA fines are too low. The $245BB, however, is astronomically larger than anything the government could credibly threaten, and it certainly playing a larger role in corporate decisionmaking than the threat of OSHA fines.
The question for OSHA is how important is its role in disseminating safety information to workers. Without OSHA, would workers charge less premium because they would be unaware of safety violations? Or more premium, because they would be less sure which employers were bad actors? In a fully libertarian world, how much would workers and employers be paying to 3rd party safety certifiers?
Posted by: DK at Feb 6, 2008 8:21:47 AM
Surely there are also criminal penalties (brought by the OSHA) to throw into the mix?
Posted by: Pat Gillett at Feb 6, 2008 8:55:57 AM
Our job death levels are low enough that they might be qualitatively changed by the extreme behavior of people on the long tail of Darwin Award competitors. If we didn't have mechanisms (like your workman's comp figure) where survivors and relatives impose costs retroactively, I don't think it's safe to assume that risk premiums on proactive wage demands would always rise enough to completely compensate.
Note also that the current incentives push employers to keep danger-to-themselves people off the payroll even for jobs which are intrinsically safe. Even the most cynical economist should wonder whether the current incentives reduce the on-the-job death toll by keeping the company cafeteria free of people who will choke to death in informal mouth-stuffing-while-armwrestling contests. That's likely not a true benefit of the policy: the cafeteria is likely safer than the tire swing in the backyard. But it's part of "the level of safety we see in the workplace."
To me, even true increases the death toll of work (not just accounting fallacies like counting cafeteria deaths without subtracting Darwin-makes-work-for-idle-hands deaths) doesn't make an open-and-shut pragmatic case for current policy. The perverse consequences of denying people authority over their lives tend to be large, and I think it's entirely appropriate to judge paternalism by its net benefit, not some convenient part of the gross benefit. But there's a politically important attitude which is passionately opposed to this, where even a few dozen cases of Darwin-Award-at-the-job-fair can be held to be unacceptable, no compensating advantages allowed, making it an open-and-shut case.
Sometimes economists come up with examples demonstrating that people are rather inconsistent about applying this kind of if-it-saves-a-life standard: selective prosecution of open-and-shut cases, more or less. But the economists don't seem to be very effective at swaying people with such logic, so unless you're really sure that workplace deaths are naturally dominated by risks covered by recognizable sensible wage negotiations, "the level of safety we see in the workplace today is about the same as the level we'd see if government just looked the other way" doesn't seem safe.
There's also another possible confounding factor: are there very risky very valuable jobs that rational actors would take if they could, but don't take now because they're illegal? I can't think of any big niches, but it can be hard to predict economic niches. Again, I don't consider this a net downside of freedom of contract, but I know I'm not in an overwhelming majority here.
On the other hand, I doubt the effects I'm talking about would more than double the gross death rate, and the union bumper-sticker conventional wisdom you're thumbing your nose at against might place it far higher than that. In an argument with someone who thinks worker mortality would rise by two orders of magnitude without current interventions, a mere factor of two is arguably "about the same level." But in a blog post "about the same level" doesn't necessarily mean "no more than a factor of two."
Posted by: William Newman at Feb 6, 2008 8:59:58 AM
OSHA has very limited resources. Employers are not living in terror of it.
This might be true but it is a non-sequitor. The point of Tyler's post seem to be -- OSHA does not issue much in the way of fines. It is revealed that it is an irrelevant organization. Regulation is useless! Markets rule!
The student and others offer up reasons for why low fines in and of itself does not necessarily mean OSHA is impotent.
Tyler turns around and say, well we know OSHA is irrelevant because it is not very well-funded.
If that is your conclusion all along, why not simply just say "OSHA is too underfunded to make a difference" instead of looking at the red herring of fines, which could be low for any number of reasons?
This post is mostly disingenuous market triumphalism.
Posted by: Battlepanda at Feb 6, 2008 9:10:17 AM
Come on people look at the numbers, 149 million to 245 billion. Do you really think that the "off-equilibrium" OSHA fines are anywhere close to the market price of safety! Obviously not. Economics requires some wisdom about magnitudes. OSHA is a drop in the bucket that has almost no impact on safety.
Worker's comp. is important but mostly as a substitute for market forces (but it did lower some transaction costs). See "Did Workers Gain from the Passage of Workers' Compensation Laws?," Quarterly Journal of Economics 110 (August 1995), pp. 713-742, with Shawn Kantor. (and their book).
If you are not convinced about OSHA you can look at the history of job-safety in this country and you won't see any difference in the trend pre and post-OSHA.
Posted by: Alex Tabarrok at Feb 6, 2008 9:40:55 AM
Pat, my understanding from work with them at one point was that the maximum criminal penalty available to OSHA for loss of life would be a misdemeanor at a max of six months in prison.
It seems pretty clear that whether from inability, unwillingness, political pressures, or whatever, OSHA is impotent in setting the cost of safety. That isn't to say that OSHA is irrelevant, just that they aren't the prime mover (at least in 2002) for what employers pay for safety. There are many functions that OSHA can provide that could go into what those employers pay, including reputation (being on the front page of the newspaper may cost more than a fine), training and standards (workers know what is and is not safe and can price accordingly), and probably a handful of other things about which I know very little. If I see any fault in Kip Viscusi's inference, it concerns the limited time frame of the inference. At least for the period he mentions, I think his point is pretty solid, at least from an enforcement perspective.
Posted by: J.Lo at Feb 6, 2008 9:51:03 AM
Workers' comp PREMIUMS are paid whether anyone's hurt or not.
Yesterday on NPR, I heard about the explosion some years back at BP's Texas City refinery. An industry rolling in profits somehow can't afford to update its refineries to modern safety standards, or at least, so it persuades its cronies in the federal government.
Posted by: Anderson at Feb 6, 2008 9:58:36 AM
"Come on people look at the numbers, 149 million to 245 billion. Do you really think that the "off-equilibrium" OSHA fines are anywhere close to the market price of safety! Obviously not."
- Alex Tabarrok
But, once again, the better enforced the laws, the lower the aggregate number should be.
If drug laws have succeeded in scaring people away from selling drugs, then fines for drug sales (if they charge a fine first instead of jail time) should be low.
The market premium on wages for selling illegal drugs may far exceed that. Does that mean it is necessarily the market premium in the wage market for selling drugs that is keeping drug sales as low as they are? Or could it be that the laws are discouraging sales?
(Granted there is risk for both employer and employee in my example, but my point holds in general terms).
I simply think that comparing these aggregated numbers is submitting to an empiricist fallacy. They aren't being interpreted correctly.
Posted by: liberty at Feb 6, 2008 10:00:27 AM
Alex, if the total fines and penalties meted out for blowing up the White House were zero last year, would that be an argument for getting the government out of the business of protecting the White House?
Likewise, if an expert said that White House protection was woefully underfunded, would that be an argument for eliminating it?
I think such arguments would only convince an anarchist who had already decided not to protect the White House.
OSHA may well be underfunded or overfunded. But the arguments in this post are non-sequitors that give the appearance of being driving more by pre-conceived ideology than sound economic reasoning.
Posted by: A student of economics at Feb 6, 2008 10:02:22 AM
"If you are not convinced about OSHA you can look at the history of job-safety in this country and you won't see any difference in the trend pre and post-OSHA."
This is not a valid argument either. Are you really saying that for OSHA to be effective it would have needed to change the trend line when it was created in 1970? Based only on your statement that the trend didn't change, OSHA could be an instrument for continuation of the existing trend. It's like saying that a lithography advance isn't necessary for Moore's Law because the trend of Moore's law didn't change when it was introduced. So far, your defenses don't do much to dent our suspicions.
Also, Bryan is cherry picking only Viscusi's disappointment with OSHA (and Tyler does nothing to correct this). Viscusi also writes:
The strong performance of workers' compensation, particularly when contrasted with the command-and-control approach of OSHA regulation, has led many economists to suggest that an injury tax be instituted as an alternative to the current regulatory standards.
Viscusi also says some economists estimate that death rates would increase 27 percent if worker's compensation laws were repealed. It looks like Bryan didn't have space to paraphrase those opinions.
Posted by: MostlyAPragmatist at Feb 6, 2008 10:22:52 AM
Thanks J.Lo. I was enquiring as a british-resident Aussie with little or no knowledge of US safety laws!
Some years ago Australia reformed it's health and safety laws from a "prescriptive" system (ever growing lists of industry-specific standards and rules) to a "proscriptive" system ( a much shorter Bill effectively stating that all employers must provide a workplace free of the risk of injury). In addition, managers at all levels can face personal fines and criminal charges.
While the "no risk" aspect may seem an impossible burden, it encouraged employers and industries to pro-actively tackle the issue of safety, rather than simply ticking the boxes specified in the previous system (the list of rules having generally evolved as specific responses to unforeseen safety incidents). The judiciary has generally displayed common sense, not presuming incident = risk = guilt.
The criminal aspect provides an inarguably stronger incentive and reduces the need for a highly resourced government safety body. If there's a case for criminal penalties against financial services transgressions, why not workplace safety?
Posted by: Pat Gillett at Feb 6, 2008 10:24:17 AM
The more I think about this the more it angers me:
Market incentives for worker safety dwarf legal incentives
This is definitely not Viscusi's point. He says that one major cause of the market incentives is worker compensation law. Someone tell me how Bryan isn't misrepresenting Viscusi here. I'm finding it *really* hard to see my adversary's point of view on this.
Posted by: MostlyAPragmatist at Feb 6, 2008 10:31:38 AM
Has anyone here had a more dangerous job than potential for carpal tunnel or death by paper cut? I'm not being facetious. I don't think people who make these command and control type rules understand how safety is really accomplished on-the-job.
"I think such arguments would only convince an anarchist who had already decided not to protect the White House."
Not true. You are making a false analogy. Since these are aggregate numbers, the logical analogy would be to compare the protection of ALL government buildings, not just one with a remarkably different situation than the "average" government building.
Although I do have a theory, or what you call ideology, it doesn't color my opinion because I spend a lot of energy being logical. And, my theory is that the existence of programs like OSHA represent the general feeling of the electorate that government should ensure job safety, no more, no less. Whether it actually does ensure safety has to do with the details-incentives, accountability, quality of workers and management, etc. Democracy is woefully inadequate at dealing with details.
Posted by: Andrew at Feb 6, 2008 10:50:09 AM
Not safety, but the same thing in my theory;
I once had a boss who said he didn't mind affirmative action because he was proud that our company made a point of going way beyond the minimum requirements of non-discrimination rules.
All I could do was stare at him and nod.
Posted by: Andrew at Feb 6, 2008 10:54:01 AM
Has any economist ever spent any time in a real business?
I have worked before and after birth of OSHA - huge difference (ranging from heavy construction to office work).
OSHA fines are low because there are so few inspectors - duh.
Posted by: save_the_rustbelt at Feb 6, 2008 10:55:21 AM
I have to agree with A_student_of_economics. His reaction was basically mine, although I confess I didn't
know the game-theoretic terminology! The fines are all, *given* employers' actions taken in fear of OSHA
fines, and A_student_of_economics's reductio about the White House is right on target. You can't just look
at the fines employers turn out to pay, after all their efforts to avoid getting fined. You have to look
at all they spent on avoiding fines. And how "empowered" would workers be to secure favorable judgments --
which drive up worker's comp premiums and wage premiums -- without the regulatory help?
(I would have made this point on Bryan_Caplan's blog, but I've been banned there, and Lauren_Landsburg won't
lift it.)
And just a note to A_student_of_economics: while I may be ideologically distant from you, I can always count
on you to present the best contrary arguments, and phrase them the clearest. For that, I greatly appreciate
your contributions and hope to see more of you. (Except the "carbon taxes are good enough as an anti-
congestion measure." That's just sloppy.)
Posted by: Person at Feb 6, 2008 10:59:21 AM
Looking the other way is not necessarily the same thing as simply not issuing fines. OSHA's study of workplace health, I would argue, is providing the standards by which other penalties are assessed. The fine for an OSHA violation itself could be ten cents, but if it becomes the basis of a lawsuit, or a bargaining point in union negotiation, the violating company could wind up paying thousands or millions.
It's also not at all clear that these three penalties are all being paid by the same companies. Those billions may indeed be sufficient to keep worker safety a priority on oil rigs and steel mills But lab work at universities, for example, is not generally considered risky, and workers comp claims seem to be low (can students even file for workers comp?). However, there have been cases of OSHA citing universities for improper storage of chemicals and such. In those cases it seems that OSHA fines would indeed be a good motivator for keeping things safe.
No, it seems to me that all this shows is that OSHA fines are only a part (possibly a small part) of a wider array of worker safety incentives, not that they are irrelevant.
Posted by: Dolohov at Feb 6, 2008 11:43:31 AM
In a fully libertarian world, how much would workers and employers be paying to 3rd party safety certifiers?
Motor sports (i.e., car racing) is (or at least was) extremely dangerous. The modern racing car is an safety miracle in many ways, especially modern sports and formula cars with carbon fiber tubs surrounding the driver. There are plenty of 3rd-party organizations which certify various pieces of equipment (as well as entire cars), put on races, etc. As far as I know there is zero regulation of the industry.
You could say its because the lives of skilled drivers are valuable, but amateur drivers participate in races where much of the same safety equipment is required.
Europe's tort system seems to allow looser rules. Drivers not participating in wheel-to-wheel races (e.g., races where safety has less external effects) in Europe seem to be able to get away with doing things in a less-safe manner. Wheel-to-wheel races seem to use the same gear as they would in America. Much of the certifications for things like fire suits, roll cages and helmets are shared between Europe, the US and Australia (via the FIA).
How would other forms of employment differ? I suppose the danger is less obvious, but in the case of motor racing the market seems to be doing a fine job. By and large, people just purchase the amount of safety gear they are personally comfortable with, and governing bodies (SCCA, NASA, FIA, WRC, NHRA, etc) take care of externalities (such as driver licensing). There are also significantly different risk levels between different classes in a single sanctioning body, so if a driver is not comfortable with one level of risk he can drive in safer class. No government needed.
I'm confused as to why workers on other jobs can't accomplish the same feats? Race car drivers are hardly the risk-averse sort.
Posted by: Grant at Feb 6, 2008 11:48:33 AM
