David R. Henderson  

Does the Market Underprovide Safety for Workers Who Are Poor?

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In a comment on a recent post of mine on worker safety, in which I highlighted the "Job Safety" entry by W. Kip Viscusi in The Concise Encyclopedia of Economics, MikeDC wrote:

If you've got an impoverished and hungry subsistence or near subsistence level population, you don't have much have to worry about their safety. You just replace them if they get hurt or die.
So I take that as a fairly legitimate moral limitation. Maybe one of the few where a free market doesnt push in the right direction.

I had promised to respond with a further post saying why the market would provide the optimal level of safety even to poor people. This is that post.

Throughout the analysis, I assume that workers have good knowledge of risks and I assume that employers want to maximize profits.

I recommend, if you have trouble following the reasoning below, that you go back to the "Job Safety" article.

Start with the employer providing less than the optimal amount of safety to low-income workers. What does it mean to say that the safety is less than optimal? It means that they would value an increment in safety more than it costs to provide. A profit-maximizing employer would see that he can provide that increment and increase his profits. The reason is that he can cut the employees' pay by more than the cost of providing the safety. That's what it means to say that the workers value the increment in safety more than the cost of provision.

So the employer provides that increment in safety. He is better off and the workers are the same off. Now let's say safety is still suboptimal. Then the employer can provide another increment of safety and pay less for it than the amount by which he can reduce workers' wages. This continues until the employer hits the optimal amount of safety.

I should point out that I'm also assuming no income or payroll taxes. If there are income or payroll taxes, which, in the United States, of course, there are, then the amount of safety for all workers will be more than optimal. Why? Because income is taxed and safety is not.

But I will leave that for another post.


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CATEGORIES: Labor Market




COMMENTS (34 to date)
john hare writes:

It is unfortunate that so many people see this as a binary issue of "you can't be too safe" at any cost. At some level of impoverished, the new mine shaft will save more lives than the safety equipment in the existing ones. Death by starvation is just as dead as black lung or cave ins, it just doesn't show up on the mine balance sheet.

The safety trade offs are a bit different if you have had children die from lack of a $10.00 vaccination, $50.00 mosquito net, or starvation before that unsafe job was available. That I wouldn't work a job with a 1% annual chance of death speaks more to my relative affluence than the morality of that job supplier.

Daniel Kuehn writes:

This is a very nice argument about the taxes especially, but I think one issue is that MikeDC was talking about moral levels of safety and your response was in terms of optimality from an economists' perspective. Now if the two of those coincide we're in business, but it may still be an open question if they don't.

As economists we think about choice and exchange under the reality of certain constraints - you use the word "optimal" so I won't be squeamish about saying that as economists we think in terms of "constrained optimization". As human beings, though, we have to decide whether the idiosyncratic constraints that different people face are legitimate for deciding all of their circumstances in life. The choice of the mine worker, given his constraints, may be optimal but it may not be the one we want him to have to make.

Daublin writes:

One subtlety in this analysis is that you are discussing the overall state of the labor market. At any given time, lots of individual work places are going to be less than optimal, and so might be more or less safe than is merited.

_NL writes:

I think the argument that workers are provided too little safety consideration is premised on the idea that there's some objective level of safety outside the market, which employers should provide but employees should not have to bear. Which doesn't really make sense, because obviously it comes out of the same pool of money that could be otherwise used to compensate workers, so therefore the workers are paying for it.

But nevertheless, the implicit presumption is that some level of safety is an objective minimum rather than safety as an incremental product purchased by offset wages.

Excessive emphasis on safety concerns of impoverished laborers is difficult to differentiate in its effects from protectionism and difficult to differentiate in its language from what in other contexts is labeled "cultural prejudice." Saying that certain groups of foreign or very poor workers put too little value on safety and need to be saved from their own working conditions is little different from saying they mistreat their children or worship the wrong religion or are too lazy or too greedy.

Some foreign workers make employment choices that are hard for me to understand, but then I don't live in a filthy slum with open sewage or in a remote village dependent upon remittances, so it's hard for me to evaluate their options from an idiosyncratic and unfamiliar viewpoint. I'm sure they'd like more safety in the abstract, but clearly they prefer unsafe jobs to no jobs.

Daniel Kuehn writes:

_NL -

Why objective? I think that the market probably doesn't provide all the safety it should but I certainly don't think that "it should" level is objective. Moreover, MikeDC doesn't seem to indicate he thinks there's an objective level out there. So what makes you think that's driving this?

I think the biggest problem with your first paragraph's analysis is that workers are only going to have to "pay for it" if (1.) it's unsubsidized, or (2.) employers hold no market power. I don't see any reason to make either of those assumptions.

I'm not sure it's helpful to suggest that the other side is culturally prejudiced either.

Jon Murphy writes:

From a purely productivity viewpoint, disregard for safety is disregard for profits. If workers are constantly getting hurt on the job, it hinders their productivity. Given that profit is tied to productivity, lower productivity means lower profit. Workers can't increase their productivity if they are being hurt or killed. Any firm would tell you constant turnover is bad.

Accidents happen in the workplace, not due to some careless disregard for safety (although I am willing to bet that may be the case in some minority of instances), but because they are indeed accidents.

Daniel Kuehn writes:

Jon Murphy -
Are you proposing the (1.) profit maximizing, (2.) productivity maximizing, (3.) utility maximizing, and (4.) morality maximizing (for lack of a better term) level of safety are all equal? I don't think you are, but if you're not then it's not particularly helpful to understand that over certain ranges these are all increasing together.

Everybody could be required to work from home encased in five inches of bubble wrap. That would be very safe, but would reduce productivity.

re: "Any firm would tell you constant turnover is bad."

I was thinking about getting into turnover in my initial comment, but didn't. Statements like this depend on what the adjustment costs are (and of course what you mean by "constant"). It may be true, but not necessarily. There are clearly high turnover/low wage profit maximizing production technologies out there coexisting with low turnover/high wage technologies.

Lee Waaks writes:

@Daniel Kuehn:
I think the biggest problem with your first paragraph's analysis is that workers are only going to have to "pay for it" if (1.) it's unsubsidized, or (2.) employers hold no market power. I don't see any reason to make either of those assumptions.

Does the fact that some employers "hold market" power mean that costs imposed by government-imposed safety regulations will be paid for exclusively out of the personal consumption of employers (i.e. fewer expensive meals)-- or does it mean reduced capital expenditures (including labor expenditure)? If it means reduced capital expenditures, wouldn't that mean that other workers -- if not the same workers -- would ultimately pay for safety in terms of lower real wages due to lowered productivity?

Daniel Kuehn writes:

Lee Waaks -
I'd assume everyone pays some of it although I'm sure you could dream up a constellation of elasticities that give other results. I haven't claimed some of this won't be paid for by the workers - I just want to get away from this idea that all of it has to be.

Moebius Street writes:

Nobody's mentioned the obvious corollary with minimum wages.

If the government sets a floor on wages, that is also setting a point at which the employer can no longer profitably increase safety. And thus, raising the minimum wage is likely to decrease worker safety. I wonder if anyone has tried to study that in the real world.

Jon Murphy writes:

Dan:

My point is this and nothing more: constantly training folks is lost time and profit, especially in manufacturing. A newbie is never as productive as a seasoned vet. No firm would willingly put the lives of its workers at unnecessary risk for the same reason it wouldn't leave equipment out to rot: it's too expensive.

Daniel Kuehn writes:

Jon -
I guess my point is just that that doesn't seem to be the question at hand (although I agree with you as far as it goes). What does "unnecessary" mean? "Necessary" is determined by some combination of the four objectives that I mentioned (which may not be exhaustive). I agree if the point is simply that under some range these things increase together, but if it's that these objectives are simultaneously satisfied that seems like a tall order.

All economics tells us is that firms are likely to profit maximize and workers are likely to utility maximize (although even that might not be true in all cases). There's no particular reason to think that anyone is in the business of productivity maximization, much less moral maximization.

Jon Murphy writes:

Dan, given that productivity is a function of profitability, I'd say economics does teach us that firms productivity maximize. Why else would firms invest in capital if not to maximize productivity, and thus profits? Why else would firms invest in worker training if not to increase productivity, and thus profits?

The two are linked.

Njnnja writes:

I'm not sure this theory works in the real world of heterogeneous workers. Just as an employer will pay some workers more than others (because doing so is more profitable), an employer would also have to customize safety protocols, giving more safety to those who both 1) value safety highly and 2) whose total compensation is higher.

But a lot of safety features can't be customized like that. Either you install a super strong safety railing that employee 1 likes or a super weak railing that employee 2 likes (and pay him more in income). Either you keep the toxicity level of the output of some machine at 1 or you keep it at 10.

And not to mention the liability associated with treating different employees differently. Imagine the employer being asked at trial "So you gave employee 1 strong eye protection because you knew how dangerous it was, but you only gave employee 2 weak eye protection because, despite the danger, you said he agreed to take more money in income. Why didn't you just pay him more money *and* give him better eye protection?"

Daniel Kuehn writes:

Jon - well I agree that two are linked but you need a little more than a functional link to say that firms productivity maximize.

I've never come across that but feel free to correct me.

Hazel Meade writes:

I think you are kind of missing the point of the objection.

To say that an impoverished worker values the increment in income more than he values the increment in safety is really just another way of stating that the worker is sufficiently impoverished and desperate to take a job which is unsafe.

The point is that workers at the subsistence level may not be able to properly evaluate tradeoffs of safety versus income. To put it another way, let's say that at the threshold of subsistence, demand for basic needs over the short term becomes extremely inelastic. The worker needs that next dollar of income just to get through the next few days. He can't afford to think about the next month or year. So he's willing to pay a high cost in safety in order to get a small increment in income.

Now, from a certain perspective, yes, the worker is merely optimizing the utility he gets - living another day is much better than dying of toxic exposure next year. However, the problem is that the employer's increase in utility is so much greater than that. The employer pays a small increment in income and avoids a large cost in worker safety. In purely dollar terms, the employer benefits much more from this transaction than the employee.

And THAT strikes many people as unjust. All of these transactions which occur on the threshold of survival strike many people as problematic. Saying that paying a million bucks for a bottle of water when you're dying of thirst in the desert is optimal to you, doesn't convince many people that it's morally ok to charge a dying person a million bucks for a bottle of water. Similarly, saying that an extra dollar is worth more to a starving worker than his physical safety doesn't convince anyone that it's morally ok to employ starving people in unsafe environments.

Dallas writes:

"I assume that workers have good knowledge of risks and I assume that employers want to maximize profits. " is a questionable set of assumptions.

In particular, humans seldom have a "good knowledge of risk" in almost any area of life. As a teenager in LA, I was immortal and drag racing on the streets in the 50's with no seat belts was acceptable.

My knowledge of vehicle risk has changed noting that these risks are a hundred or more times higher than "terrorism" and the TSA shakedown provides far less real safety that the few seconds to clip the seat belt. Even the cost/passenger mile of my seat belts and air bags is small relative to the TSA fees added to the plane ticket. This is all aside from the fact that we know that seatbelts, etc. actually decrease risk, but have no idea whether TSA, beyond changing the negotiation rules, cockpit doors and passenger likely responses, has made any change in risk probabilities.

Many safety laws and regulations and our perceptions of risk are based upon single events somewhere in the world or the hypothetical musings of some bureaucrat. In terms of real risk to individuals, a good rule of thumb is that if something is covered in the nightly news, it is such a low risk event as to be of low individual concern, especially relative to that drive to a supermarket or eating that double cheese burger with fries.

Tom DeMeo writes:

I think everyone is thinking theoretically here when we have plenty of historical knowledge how this plays out.

Having demand for labor, wages and safety reach a natural equilibrium is nothing to apologize for.

The issue is really one of corruption. Lies are told, contracts are not honored, illegals are hired and then exploited, officials are bribed, violence is used. Social cohesion is too weak to fight these things off.

Take that stuff out of the equation and the moral dilemmas melt away.

Jon Murphy writes:

Jon - well I agree that two are linked but you need a little more than a functional link to say that firms productivity maximize.

It's more than a functional link. It's a necessary condition. An inefficient firm cannot profit maximize. An inefficient firm will have a lower profit than an efficient firm.

Productivity is correlated with profitability because productivity causes profitability.

Daniel Kuehn writes:

Jon -
Define efficient and inefficient - I'm not sure whether I agree or disagree with your claim. We're moving from maximization talk to efficiency/inefficiency talk.

My claim is that if the profit maximizing position is the productivity maximizing position (or the safety maximizing position) it is pure accident (no pun intended). Productivity incurs costs and it provides benefits (same with ensuring safety). There is no particular reason to think that the position of maximum net benefit from the firm's perspective is the position of maximum productivity. It almost certainly isn't. We have lots of low productivity, low efficiency workers out there. And they get paid badly.

I am talking basic marginal analysis here. I'm not sure what the argument is behind your analysis.

IVV writes:

"Throughout the analysis, I assume that workers have good knowledge of risks and I assume that employers want to maximize profits."

See, there's the problem. Workers do not have good knowledge of risks, or more precisely, do not view the tradeoff with the same time horizon as the employers. As a result, the optimal solution is the one where the employer skimps on both safety and pay, and the worker gets to live in a hovel for a day longer, maybe.

Floccina writes:

Considering how much risk people take in their personal lives I think employers get it just about right. I think fisherman is the most dangerous job. People know it is dangerous how could we ever know if they under or over estimate the dangers.

http://www.bloomberg.com/graphics/2015-dangerous-jobs/

The most dangerous jobs do seem to earn a premium relative to similar skill level jobs.
Farmers and ranchers is high, are they mostly self employed?

Michael Byrnes writes:

A workers can only "vote" on whether an employer provides the optimal amount of safety in a very crude sense. He can choose to work there, or not. In most circumstances he can't choose to work there, at a lower salary, but with safety upgrades.

He could work somewhere else. But if firm A provides an unsafe workplace, it is not necessarily likely that there also exists a firm B, which provides similar work, at lower pay but in a safer workplace. And even if there was such a firm, no guarantee that they are hiring.

Rob Fox writes:

Interesting argument but based on an invalid assumption: " I assume that workers have good knowledge of risks..." is a bad assumption that spoils the argument. Low income workers are usually in the lower compensation bracket precisely because they do not have the level of education or situational awareness required to work at a higher level. In fact, many educated workers and even professionals lack sufficient risk acuity to properly assess the risks to which they are exposed (or to which they expose themselves). So, with an invalid premise, I'm afraid the argument fails despite the noble intent of proving that a free market will cover worker risk issues. This is why workers' compensation law is important and it is what drives employers to adopt prudent safety measures and provide insurance to cover work-related accidents. Lacking workers comp, the free market can freely disregard risk to personal safety and use human resources as fungible billing units.

Joe Torben writes:

Almost all of the people who disagree say, in effect, "low-skilled workers are stupid and don't know what's best for them. Therefore, government must protect them." That is such a sad view to have of your fellow man. Fortunately, it's incorrect. Unfortunately, enough people pretend that it's correct when they vote.

Isn't it strange how it's always other people that need to be protected, never you yourself? You obviously know what's best for you, but your poor uneducated neighbours, they sure need protection!

Daniel Kuehn writes:

Joe Torben -

Can you elaborate on who here has said that? That's a nasty accusation to make without more elaboration.

I've seen two major arguments on here: that morally optimal is not the same as the optimal economists talk about, and that workers don't know all the risks. Neither of those things say what you're suggesting (I personally think the second one is not particularly important, but it's certainly not saying anyone is stupid - humans generally have cognitive failings around perceptions of risk. It doesn't make sense to call that being stupid - it's baked into the cake in the case of human brains).

Hazel Meade writes:

@Joe Toeben,

Keep in mind that I consider myself a libertarian and I am generally in agreement with the argument that markets are superior. I just don't think Henderson is making a good argument in this post.

Let me put this another way. As I said, at the threshold of subsistence many people will pay very high prices for the minimum requirements to continue living. In this case, the workers are paying a very high price in long-term risk of death or injury, to satisfy a short term need just to live. That exchange may be optimal from an economic perspective since the worker is better off living for another week than dying today.

On the other hand, lets say the employer saves a much larger dollar amount by cutting safety measures than the worker receives in additional pay. If we imagined that the employer, instead of taking the extra profit from cutting safety measures instead redistributed half of it to the workers in extra pay, that might be sufficient to change the worker's calculation about safety. As long as the worker stays at the subsistence level he remains in the inelastic region where he's willing to make very unbalanced exchanges for a little extra money. But as soon as the worker's pay rises above subsistence level, the equilibrium could shift dramatically.

What I'm suggesting here is that there might multiple optima in regions of the space where there are sharp changes in elasticity of demand for certain goods. Pushing the worker's income away from the region where demand for basic food and water is inelastic could put the safety vs. income equilibrium in a significantly different place. Workers might be willing to sacrifice a little income for big improvements in safety when they aren't living under threat of starvation.


Ron writes:

The problem is that no one quantifies safety unless required to by the authorities. They wouldn't even keep accident records if it wasn't required. Employers would bury the data so employees would not realize how much risk they were at. Then, too, plenty of struggling people have historically been all to ready to put themselves at known risk in order to feel they were doing all they could for their families. And employers have been all too willing to exploit this impulse.

Matt writes:

There are two crucial arguments here:

1. Firms and workers already have a joint incentive to reach their privately optimal mix of wages and other job attributes (like safety).

2. In general, privately optimal will not be the same as socially optimal, because there are fiscal externalities. Usually, this means that firm/worker optimization will result in wages that are (socially) too low and non-pecuniary job quality that is too high, because the former is taxed and the latter isn't. This is a powerful argument against government interventions that try to improve job quality (implicitly at the expense of wages), because on average this will compound existing distortions.

I don't think most progressives have come anywhere close to internalizing (1) and (2), and it's worth repeating these again and again and again.

That said, I do suspect that there are powerful forces pushing in the other direction, so that employers sometimes opt for inefficiently low quality jobs. This can arise from incomplete information, time inconsistency, or externalities. Job attributes vary in the extent to which they're subject to these market failures.

On the one hand, for job attributes that are transparent, delivered immediately, and fully internalized within the firm, the logic in (1) applies - so that we expect firms and workers to reach a privately optimal bargain, and even bilk the taxman a little in the process as per (2). On the other hand, for job attributes that are opaque, require some kind of commitment by the firm, or inflict some kind of harm outside the firm, the inefficiency could be so powerful as to overwhelm (2) and imply job quality that is too low. Some examples:

- basic, immediately observable attributes like job location or hours will be privately efficient (except maybe around the edges, like the punishment for arriving late or week-to-week scheduling practices when hours vary)

- conditions of employment like drug tests are observable and immediate, but may inflict compositional externalities (by weeding out addicts yourself, you increase the proportion of hidden addicts in the remaining labor pool), making them inefficiently frequent among employers

- subtle, hard-to-codify features of the job, like the nastiness of floor management, suffer from a double dose of imperfect information and time inconsistency - you don't know exactly how nice the employer is going to be ex ante, and even if an employer has some reputation for niceness, there is always a temptation to default on that reputation (or maybe it's hard to get into a good reputational equilibrium in the first place).

and finally...

- safety arguably suffers from all three problems discussed above, because (A) some aspects of safety, particularly the exact chances of low-probability but disastrous outcomes, are hard to determine for a worker; (B) you sign up for a job ex ante not knowing how the employer might modify its approach to safety ex post; and (C) some of the costs of an accident might fall onto the public safety net.

It's not clear whether policy can do much about (A), except perhaps try to make information more broadly available. It can address (B) and (C) by making employers pay (within reason) more of the costs of accidents ex post, so that its incentives aren't warped by time inconsistency and it's not shifting any of the load to the public sector.

(And this is true more generally: government is best at tackling externalities, less appropriate for tackling time inconsistency, and less appropriate still - but not completely useless - for tackling bilateral incomplete information.)

Peter Gerdes writes:

Isn't the obvious problem that of incomplete (and thus influenceable) beliefs by workers about risks.

Workers mistakenly tend to believe certain activities pose low risk...particularly activities similar to ones they perform in daily life (driving, walking etc..). If the company tries to increase the safety of these activities it will alert employees to the fact their risk estimates were too low and push them out of the psychological blind spot. Indeed, certain kinds of safety precautions such as those regarding scary sounding but relatively benign toxins may well cause individuals to make larger errors in their risk assessment than if no effort at safety was made.

Thus many risky activities at work may lie in the unfortunate area where the supposed benefit to the company is more than compensated for by their loss due to worker's increased awareness of risk.

Swami writes:

Matt's comment is absolutely excellent and elevates the discussion.

Daniel Kuehn writes:

I think Matt's comment is fine and the externalities and asymmetries and information problems contribute to this, but I think it still suffers from David's initial problem of jumping to economists' definitions of "optimal".

Even if you pull back and talk about social optimality you are still talking about the aggregation of private optimums that are a function of the constraints faced by various individuals.

When it comes to basic issues of human dignity I think the point is private optimality is not a sufficient standard for the morally optimal solution.

MikeDC writes:

Daniel Kuehn and Hazel Meade pretty straightforwardly state my objection. I think I'd just reiterate that the problem comes when the equilibrium wage is sufficiently low that the optimal trade off David suggests would seem to no longer work. Suppose the cost of safety is $0.25 a day and the employees value it at $0.50 a day. So it seems like a trade is in the offing, except suppose the going wage is only the $2.00/day that supposedly constitutes a basic subsistence wage in the poorer parts of the world.

At less than $2.00 a day, we can say the employee starves. So the worker won't seek this safety and the employee won't grant it. Because a probability of getting hurt is a better risk than a certainty of starving.

This problem isn't present beyond the subsistence level. In fact, we should see optimal safety come into place pretty quickly beyond the subsistence level for the reasons David explains. That is, once the worker is fed and housed, she might prefer $0.50 of safety to $0.25 of pay. But at the lower bound of subsistence, the "demand" to stay alive is pretty inelastic.

_NL writes:

Dan Kuehn:

Objective in the sense that such advocates often treat the optimal level of safety as though it should not be left to the subjective impressions of workers and employers for their own part, but that primary authority should be given to an outside appraisal of what is best. In other words, there is some method to independently determine what level of safety is best, without recourse to letting the parties involved dictate the answer.

I'll grant that some people may overtly believe that their own subjective safety preferences should be substituted for the subjective safety preferences of others, but in my anecdotal experience most advocates of "greater safety" implicitly assert that safety levels have moral weight rather than mere preference substitution. It sounds like you place yourself in the minority category: you nakedly believe in substituting your preference over the preferences of others, without pretending to a higher claim.

By itself, a safety mandate increases the cost of operations. A higher cost of operations means trade-offs somewhere else, maybe in salaries or benefits, maybe number of workers, maybe in scaled-back safety features that are not subject to a mandate, maybe any other costs, or else to profits. Since the managers and owners can choose to shift costs to preserve profits, most mandates involve higher costs. Subsidies may in some cases relocate the tradeoff so it falls on parties less likely to notice, such as taxpayers or consumers.

I understand that "cultural prejudice" is not a flattering characterization to the recipients of that charge. In the international context, most Western reporting, discussion and prescriptions are given from the Western perspective, without regard to the choices faced by foreign workers and employers on the ground. Viewing the actions of others through your own cultural expectations is an inappropriate way to evaluate others' decisions, and the shorthand for making such assumptions is "cultural prejudice."

Assuming that other people have the same expectations, perspectives, goals and values, then questioning their choices for failing to satisfy those premises, is prejudice. Conversely, if you acknowledge they have different goals and perspective, but want to override their choices purely for your own appraisal of what is best, that might be charitably called paternalism and less charitably called imperialism.

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