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.

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

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.

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.

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.

Surely there are also criminal penalties (brought by the OSHA) to throw into the mix?

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.

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.

"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.

"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.

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.

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.

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.)

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.

"I have worked before and after birth of OSHA - huge difference"

I've never heard an economist or a libertarian claim that government intervention doesn't have an effect. That's a common strawman I often get.

Grant, just a few reasons why motor sports is hardly a typical industry:
1. Teams are small, and drivers important parts of it. The people at risk have a lot of influence on team decisions. In most industries, people at the riskiest position are lowest-level employees in large organizations, whose main choice with regards to unsafe equipment/practices is to leave their job.

2. Racing is hardly a typical competitive industry. Sure, they compete in the race, but from an economic point of view they are cooperating in giving a show towards an audience. One of the results of this is that governing bodies and regulations are already needed for other purposes than safety.

3. Another is that people have no reason at all to object to industry-wide safety regulations, as long as the other teams have to obey them too. Sure, it means more money to safety and less to speed, but that doesn't affect profit margins, if that even is what race teams are after. In the real world, safety regulations raise cost and dimish total income, even if everyone in the industry obliges and profit margins are not affected.

4. Racing is still very dangerous. As you mention, race car drivers are hardly risk-averse. If there are lessons to be learned from it, they might apply to other professions where life-threatening risks are around all the time, and where people are actively concious of them. But most safety regulations are aimed at activities that are not risky enough to be concerned with risk all the time, but where accidents still happen.

The "enforcement game" only yields 100% compliance when fines and enforcement activity can be set at a sufficiently high level. That is not the case here, due to limited liability and bankruptcy. So the "game" between OSHA and firms only has an equilibrium in mixed strategies. The expected fine determines the overall level of compliance, and ex post fines will be positive.

The wage premium demanded by workers and the level of expected fines both serve to increase the overall level of job safety if the regulation is not redundant, so a change in either of them will affect the other in the same direction. The absolute value of *neither* indicates its effectiveness in reducing job safety risks, but their relavtive magnitudes do provide a rough indication of their respective importance. This measure is hardly exact, because of the difference between marginal and average effects, but it *is* informative.

One of the things people fail to mention about OSHA is that it is just about impossible to follow all the rules to the letter.

It is a great blessing to our economy that OSHA is underfunded and does such few inspections - Because following OSHA requirements to the letter would pretty much shut down the U.S. economy.

Hasn't anyone heard of Work-To-Rule? Would any of you who think OSHA is a great idea care to defend the idea that any employer could actually comply with all OSHA regulations as possible?

A system that gives such few fines, and yet at the same time has a code of regulations that makes virtually every workplace in violation, doesn't not seem effective at all. It seems pretty disfunctional to me.

Pretty much the primary purpose of OSHA is to give government officials the power to arbitarily give fines and/or shut down any workplace and buisness they see fit, while at the same time making people feel good that there are "worker safety regulations".

A far, far, far better alternative to OSHA would to simply make it the law that all buisnesses must compensate injured workers out of their own pockets.

Tyler,

Leaving the dollar amounts aside, what about viewing OSHA from an institutional stand point? It seems the post makes a big leap based on only a neo-classical perspective. Having worked construction I think OSHA plays an important role in establishing safety norms and providing a check against firms. If OSHA didn't exist would there be some other sort of institution to fills its place? Probably, but it is less likely that there would be a national standard. It is more likely that it would be filled by labor unions.

At first I was inclined to disagree with this post because my factory does a lot to comply with OSHA, and rarely mentions the other two factors. However, I do know that things like adding guards and raising work surfaces to prevent back injuries usually follow a review by our worker's comp company. But it's hard to see many safety improvements made in order to lure better workers. In fact you might say that employers pay a wage premium to avoid making safety improvements. Yeah, I know in theory they would make the safety improvements if they thought it was worth saving the wage premium, but in practice it's really invisible.

One of the many reasons why OSHA is ineffective is that it is, like many government programs, much too top-down. The way to find out what safety measures are useful in a particular place is to talk to the people on the shop floor--OSHA doesn't do that. Also, it can't do anything about job turnover, which is very important from a safety point of view: it's usually the new guys who get hurt. My impression from talking to people who have a lot of experience with OSHA is that they mostly agree that it's ineffective. Some of them think that's because it's underfunded, and therefore weak; others offer other reasons. I don't know anyone knowledgeable about OSHA who think it accomplishes much, if anything.

Rex Rino -- work to rules means that the employees followed every union contract rule to the letter as a means of costing the company big bucks. It has nothing to do with OSHA regulations.

Out of the 5,000 deaths, half of them involve transportation. The number of motor vehicle deaths is a lot higher then workplace deaths. People drive without giving it a second thought. It seems to me that once the death rate is below a certain threshold that it doesn't have much effect on behavior.

I also wouldn't be surprised if every death on a job site isn't visited by OSHA, the Workers Comp insurer, and a plaintiffs attorney or surrogate.

Also for larger employers, Workers Comp premiums are experience rated.

If you can measure it and it costs money, larger businesses will respond.

that doesn't keep employees from demanding that employers cover the costs of on-the-job injuries.

How exactly do they make this demand? On-the-job injuries are generally covered by workers' compensation laws. I'm not particularly knowledgeable about these laws, but I do know that they pretty strictly limit employers' liability.

Ziggurat,

I'm not sure what your point is. I was just suggesting that the much-touted chart doesn't quite show what some, including Tyler, claim.

I found this on some MSN site:. Some data might help in the discussion.

The 10 most dangerous jobs
Occupation Fatalities per 100,000
Timber cutters 117.8
Fishers 71.1
Pilots and navigators 69.8
Structural metal workers 58.2
Drivers-sales workers 37.9
Roofers 37
Electrical power installers 32.5
Farm occupations 28
Construction laborers 27.7
Truck drivers 25
Source: Bureau of Labor Statistics; survey of occupations with minimum 30 fatalities and 45,000 workers in 2002

I don't know what to make of it. A few interesting points: the Drivers/truck drivers categories suggest that general workplace safety is so high that just being on the highway a lot is enough to get your job in the top 10. Whether this a good sign about workplace safety or bad about the highway, is hard to say.

Second: it seems as if the 4 top dangerous jobs (timber cutters, fishers, pilots and metal workers) are generally acknowledged as dangerous, and these people definitely get paid more to compensate. I suspect, but not on strong grounds, that a lot of the 260 billion mentioned in the original post is going to these jobs and similarly dangerous ones that didn't have enough workers to make it to the top-10.
But the rest of the top 10 are jobs with a lot of people alltogether in those categories, that might be seen as accident-prone, but not as jobs where danger is a main factor. I wouldn't be surprised if people, both employers and employees, in these groups are underestimating how risky these jobs can be compared with the top-dangerous jobs.

I am not sure how good death rates are as proxy for serious accidents/injuries in general. Especially the top three jobs here (timber cutters, fishers and pilots) are probably jobs with relatively high death-to-injury ratios.

Finally, out of the 5500 death measured in the survey, apparently 609 were homicides, mainly of retail personel. That is a bit disturbing.

The chart showing no break in trend when OSHA was created should not be a surprise.

All the creation of OSHA amounted to was a bureaucratic reorganization.

Over the years Congress has created a series of different laws creating safety standards for different industries and occupations. Each time they passed a new law they gave a different government department the responsibility of enforcing the new law and establishing regulations. So you would have an organization in the department of interior enforcing one set of laws, another division in the department of labor enforcing a different set of laws and regulation and a third in Commerce, and so on and so on and so on.

All OSHA did was take these various organizations scattered throughout Washington and place them all under one umbrella organization. The creation of OSHA did not create any new laws or regulation or expand the number of regulator or lawyers.

So there is no reason to expect it to generate a change in trend.

I recognize this isn't the main point, but the chart perfectly shows what one would expect
as an economy shifts from an Industrial base to a service base. Nothing more or less than that.

Grant,

Some information:

Workers' Compensation laws are designed to ensure that employees who are injured or disabled on the job are provided with fixed monetary awards, eliminating the need for litigation. These laws also provide benefits for dependents of those workers who are killed because of work-related accidents or illnesses. Some laws also protect employers and fellow workers by limiting the amount an injured employee can recover from an employer and by eliminating the liability of co-workers in most accidents.

I recognize this isn't the main point, but the chart perfectly shows what one would expect
as an economy shifts from an Industrial base to a service base. Nothing more or less than that.

No doubt there are lots of reasons for the continuing decline, one of which is the shift you describe. I think it's going too far to say that that is the only factor at work.

Spencer's comment is worth taking into account also. It's not the case that there were no safety regulations prior to OSHA. The establishment of these rules has been an ongoing process, both before and after 1969. Surely it's plausible, despite the preachings of the GMU economics department, that these rules helped improve safety.

Rex Rino -- work to rules means that the employees followed every union contract rule to the letter as a means of costing the company big bucks. It has nothing to do with OSHA regulations.

From the Merriam Webster dictionary:

"the practice of working to the strictest interpretation of the rules as a job action".

The rules could be union rules, enviornmental rules, safety rules, doesn't matter.

But obviously you chose to be pedantic about the term "work-to-rule", because you can't refute my statement that it is impossible to be in full compliance with OSHA regulations.

You know those powered platform lifts, the ones that are used for tasks like changing light bulbs. I suspect their use is much more due to OSHA regulations than to the high price of laborers willing to climb a ladder and work with two hands free.

If the wage premium for risky activities really is responsible for 1,000 times as much safety-increasing incentive, shouldn't you be able to point to 1,000 things employers do to prevent falls for every 1 thing you can point to that OSHA does? But in fact I can point to at most two or three, such as the railings on our catwalks. The harnesses we wear to keep us from falling off the railcars are from the insurance company, not the wage premium. The size of the wage premium represents the amount employers are willing to pay to not make safety improvements. With no new rules, but an increasing wage premium, safety wouldn't increase at all.

"I disagree that OSHA is *not* about prevention," that should have said.

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