Transcript Value of a Life: - University of Toronto

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
Less than 20
25
30
35
40
45
50
55
60 or older
Compensation
$114,805.68
$105,238.53
$95,671.39
$86,104.25
$76,537.11
$66,969.97
$57,402.82
$47,835.68
$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 late1960s 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 costbenefit 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
T
r is the discount rate EU  q* 1 u x (1)

t
t
t t
1  r 
t 1
T is the maximum
life span
Ut (xt) is the utility of
xt at time t
• 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
*
t
q
EU  u x 
t
t 1 1  r 
• 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*
*
T

q
qit 
u x 

( 2)
t
t
 t 1 1  r  t 1 1  r  

T
*
jt
• 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

m 
m
u x 

(3)
t
t
 t 1 1  r  t 1 1  r  

T
*
it
T
*
jt
• 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.