Differentiating occupational illness and injury: The private costs and economic incentives

Abstract

The private incentives to supply occupational safety and health activities result from the expected costs of workplace injury and illness. Expected costs in turn depend on both the probability of occurrence and the magnitude of illness and injury costs when they occur. The probability of illness and injury are difficult to specify, but for different reasons. Occupational illness results from prolonged exposure to a hazard or hazards over time, while the causes of injury-producing accidents at a point in time are not well understood. Similarly, difficulty exists in making a priori estimates of illness and injury costs to workers, since both impairment and disability are related to personal characteristics and preferences. In addition, non-human capital costs, such as damage to plant and equipment, are often associated with the occurrence of accidents.

While this paper analyzes expected illness and injury costs in detail, emphasis is also given to differences in cost distribution since the private incentive to undertake prevention activity is related to the costs borne by each economic agent. Damage costs to non-human capital, for example, are often borne completely by the firm, while worker injury and illness costs are distributed among the worker, the firm, and society. Depending on the production process, therefore, incentives for the firm to undertake injury prevention activities may exist even in the absence of risk-related wage differentials. Since the strength of private incentives are a central concern in the efficient allocation of resources by occupational safety and health agencies, the policy implications of the analysis for workplace regulation are presented in the conclusion.