Value of a Life:

1. Value of a Life: Compensation and Regulation of Asbestos and other Work Hazards

2. 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:

3. Private vs Social Cost in Workplace Safety

4. What does a world with externalities look like?

5. Historical Perspective: Fatal Work Accidents in 1924

6. 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

7. 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 are not directly observable in the market. • Generally these are shadow values; they are not observable they can be inferred from prices or choices that are observable.

8. 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

9. Background on Asbestos • 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

10. Asbestos Fibres on a Rock

11. Asbestos Insulation on pipes

12. Health Risks of Asbestos Fibres • Abestos 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.

13. Health Risks of Asbestos Fibres

14. Some Figures on the Incidence of Asbestos Related Disease • Mesothelioma was the most common cause of workplace death in Canada for every year between 2007 and 2012; increasing from about 180 to over 220 deaths per year. • In 2012 there 977 workplace deaths; • Between 2000 and 2012 the number of workplace deaths averaged about 972, according to figures complied by the ACWCB

15. Some Figures on the Incidence of Asbestos Related Disease • Workers in construction trades are those most at risk of asbestos exposure. • The Canadian Partnership Against Cancer conducted a study that found about 152,000 workers had been exposed to asbestos in the workplace, which included 133,800 workers in various construction trades

16. 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 standards • How to compensate persons for exposure to asbestos • Need to value benefits (i.e., put a dollar value on lives you save with regulation) • Need to value costs (i.e., figure out what it costs you to save a life).

17. Benefits of Saving A Life • This is not observable. • Markets do not provide valuations of a persons life (at least markets that are reputable or legal). • Shadow values can be computed from observed choices of individuals and these can be used to obtain the value of a life.

18. Statistical Value of a Life • An economic approach for determining the shadow value of a life. • 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;

19. 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

20. 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

22. 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

23. 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

24. Evaluating Regulations Protecting Workers from Absestos Exposure • As noted earlier, Asbestos exposure has some very serious health risks. Up until the late-1960s it 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 as well as some floor and ceiling tiles

25. In the 1970s governments began to set more regulations on the use of asbestos and the exposure limits for workers who handled asbestos. • We’ll consider these regulations from a cost-benefit 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

26. There are a few ways to measure the harm that results from exposure, but both amount to willingness-to-pay measures • These measures give you an estimate of the cost of saving a life.

27. With this measure, qt* is the probability of surviving from period 1 to period t • r is the discount rate • T is the maximum life span • Ut (xt) is the utility of xt at time t

28. 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

29. 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*

31. 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

33. 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

34. 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

35. In the U.S. the Occupational Health and Safety Agency (OHSA) implemented 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

36. 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.

37. 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 Transportation 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).

38. The end result of the regulation is that asbestos is no longer really used in the U.S. and many other countries 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 you end up substituting away from asbestos and using other materials.

39. Canadian Experience and Perspective • While the U.S. and many other countries have banned asbestos or placed tough safety regulations for allowed uses, Canadian regulations on asbestos are much different • For example, in the Federal jurisdiction workers can be exposed to 1 asbestos fibre per cubic centimeter of air, which is about 10 times higher than what is permitted in the U.S. or Europe (as well as a few provincial jurisdictions).

40. Health and Welfare Canada’s position is that “safe and controlled use” of Chrysotile asbestos, which is mined in Quebec, poses little health risks to people • The Surgeon General of the U.S. recently stated that there is no known safe level of asbestos exposure. • The government of Australia also considers any exposure level unsafe, no matter how small

41. Canada vs Australia

42. How can the differences in asbestos regulations between Canada and other countries be explained? • From the perspective of a cost-benefit analysis, the figure for the cost of saving a life in Canada is much lower than that used in other countries, so you end up with it still being used.

43. What is the right level for the cost of saving a life? • That will depend on what government regulators decide after reviewing the evidence they consider to be relevant.