One possible approach is to prioritize risk reduction tasks based on hazard magnitude. However, few would argue that we should abandon efforts to reduce minor risks, such as those posed by workplace and domestic disasters, and reallocate those resources to asteroid defense.' The key question is the risk reduction that can be achieved for any given expenditure and the value that society places on that risk reduction. Workers' compensation after an injury is usually a function of w where the exact relationship is included in the functional form for V(w).6 The.
Combinations of pay and risk that keep the worker's expected level of utility constant are composed of points that satisfy. The observed (pi,wi) reflects the impact of both supply and demand on the market equilibrium for the entire group of workers.8 The estimated degree of trade-off aw/ap is equal to the slope of constant expected utility loci tangent to XX, which provides a local measure of the wage-risk trade-off for marginal changes in risk. In order to isolate the wage risk premium, the wage equation must include other characteristics of the worker's work.
Review of Risk Tradeoffs in the Labor Market Literature
None of the sets of survey data listed include any objective measure of the risks posed by the worker's specific job. 3 The upward bias in risk assessments will in turn tend to produce low estimates of the value of life, as appears to be the case. The considerable variation in the value-of-life estimates in Table 2 with the level of risk, which is a result of the combined influence of worker and firm heterogeneity, suggests that one should exercise considerable caution in extrapolating of estimates on risk ranges. .
Twelve of the studies listed in Table 2 use BLS risk data based on risks associated with different industries. 39 Some initial attempts to address the role of these worker differences involved the interaction of the risk variable with demographic characteristic variables. Most of what is available is a comparison of wage premiums generated by different measures of risk.
The overall size of the risk is on the order of 1/10,000, with agriculture, mining, construction and transport representing above average risk industries. The direction of the risk differences between the BLS and NIOSH data varies by industry. In practice, the main difference is that estimates of the wage-risk trade-off based on NIOSH data are about twice as large as the BLS data, which.
In addition, some of these studies include a measure of nonfatal work-related risk. Lifetime value is not a universal constant, but reflects the wage-risk trade-off relative to the preferences of workers in a given sample.
The Implicit Value of Injury Based on Labor Market Studies
The first of the injury variables used was the BLS injury rate data collected before the advent of OSHA and the introduction of the new reporting system (see Viscusi 1978a, 1978b, 1979). To capture injuries of greater severity, some studies used only the lost workday injury component of the reported BLS nonfatal accident statistics (see Viscusi and Moore 1987; and Kniesner and Leeth 1991). These two studies provide values of workers' subjective risk perceptions that are the counterparts of the two currently maintained BLS injury rate ranges.47.
The first equation is the hedonic income locus - the envelope of the firms' isowin curves for the annual income Y provides for positions of different risk. French and Kendall (1992) relied on Federal Railroad Administration injury rate data to derive estimates of the implicit value of work injuries. Most of the estimates based on data for all injuries, regardless of severity, are grouped in the range.
The value of lost work injuries is around $50,000, or at the high end of the range for estimates of the implied value of total injuries. The subjectively rated counterparts of total injury rate in Viscusi and O'Connor (1984) and risk of lost workdays in Hersch and Viscusi (1990) are also consistent with these patterns. Revealed differences in risk taking influence risk premium estimates in the expected direction, as the implied value of injury is $30,781 for smokers, $56,537 for the full sample, and $56,537 for the full sample.
After adjusting for income level differences, Butler's (1983) results for the typical airline passenger imply an injury value of $34,794. The study of railroad worker injuries by French and Kendall (1991) gives an implied value per injury of $38,200—or $34,716 for the typical airline passenger income level—which is well within the range of the aforementioned studies of injury at work.
Other Market Evidence on Implicit Tradeoffs
Nevertheless, even if the labor market estimates are more accurate reflections of the market equilibrium, the evidence from product markets is also valuable. Obtaining estimates of the value of life and health in a variety of risk contexts should improve our confidence in the existence of such disorders. A major difference between the studies is the observability of the monetary component of the trade-off.
Viscusi: The Value of Risks to Life and Health from 1937, a study closely paralleling the labor market. The dependent variable in their hedonic pricing model is the purchase price of the car, which is analogous to the wage variable. Explanatory variables consist of relevant product market job characteristics (eg, Consumer Reports comfort ratings, EPA fuel efficiency ratings) and individual characteristics (eg, driver age and sex).
Many of the other studies use imputed values of the monetary component of the risk trade-off, potentially introducing another source of error. Consider, for example, Glenn Blomquist's (1979) imaginative analysis of the decision to wear a seat belt. Before the advent of the state's mandatory seat belt laws, only 17.2 percent of the population always used seat belts, 9.7 used the seat belt most of the time, 26 percent used the seat belt sometimes, and 46.6 percent never used seat belts.5" The biggest problem in this analysis, the value is attached to the time and inconvenience costs of wearing a seat belt, which are not directly observable.
The monetary component of the risk trade-off analyzed by Blomquist (1979) is the value of the time required to fasten a seat belt, which he estimates at eight seconds per use. This high rating reflects private risk assessments by consumers of the firm's products, the total cost of indemnity awards, and possibly a low assessment of the overall quality of the firm's operations as well.
Surveys and Contingent Valuations Market-based evidence on risk
Second, significant estimation problems remain regarding the identification and meaning of risk premium estimates. In the case of labor market studies, there are other non-pecuniary aspects of the job that are associated with risk, which must also be taken into account to isolate the risk trade-off. Many of the product market studies encounter similar problems, with the added complication that it is often necessary to attribute the monetary component of the trade-off.
The most that can be achieved with a well-designed labor market survey is an evaluation of the local trade-off at a point such as B. Perhaps most importantly, information regarding two or more points along a constant expected utility locus allows estimation of the utility functions governing behavior. The nature of the impact of health impacts on the supply function is an important issue.
The entire structure of the optimal social security effort therefore depends on the nature of the utility functions. Furthermore, assessing the valuations of various step changes in the risk of loss is straightforward when we know that the health outcome is valued at some fixed monetary amount. One of the main advantages of survey-type approaches is that the analysis need not be limited by the availability of market data.
Consider two different valuation studies of the same health outcome using surveys involving different levels of risk. The value of the morbidity effects such as skin poisoning and chloramine gassing is in a more reasonable range, as the health effects assessed in this study range in value from $700 to $3,500.
Policy Implications
Viscusi: Value of Hazards to Life and Health 1943 than the individuals being protected from. Knowing the positive elasticity of the value of life with respect to the income of workers will lead to the use of different values of life depending on the population being protected. The 1980s marked the first decade in which the use of life value estimates based on risk trade-offs became widespread throughout the federal government.
Previously, agencies assessed only the lost present value of the deceased's earnings, leading to a dramatic underestimation of the benefit value. Office of Management and Budget, agencies such as OSHA and EPA began incorporating value-of-life estimates into their performance evaluations.55 Policymakers' recognition of the non-economic aspects of life is an important advance. Given the extent of uncertainty in the value-of-life estimates, perhaps the most reasonable use of these values in policy contexts is to provide a broad index of the overall desirability of a policy.
In practice, debates about the value of a life rarely focus on whether the appropriate value of a life should be $3 million or $4 million—small differences that cannot be discerned based on the accuracy of current estimates and the potential limitations of individual behavior that underlie those estimates. Ratings will be most useful in addressing the most egregious policy errors, as opposed to precisely determining the value of life that should guide policy decisions. The major change needed is the establishment of an appropriate schedule of life values that is relevant to various at-risk populations.
The Office of Management and Budget (1990, pp. 661-63) has developed explicit guidelines on the use of implicit values of life and health. 34; The Value of a Statistical Life in New Zealand." Report to the Department of Transport, Land Transport Division, 1991.
