Wednesday, November 08, 2006

Why workers compensation is worth understanding?

Adequate compensation for injured workers can present quite a puzzle. Especially if one is interested in the ability of markets and is against government intervention. A little background on the issue might help. I have given a short intro to it earlier here. This blog-note updates my recent understanding of the issue. I will mention some of the concepts and realities that are driving the system. More detailed info on workers comp in USA can be found here.

The trade-off between "average justice" and "individual justice". Given that there are huge costs and uncertain benefits in litigation for an injured worker especially (when he is injured) the system tries to provide a certain comp upfront and the rest based on admin rules like calculation of the disability. This approach tries to capture systemic efficiency rather than efficiency in justice at the individual level.

Regulations could turn undesirable at either end of the spectrum. Too much of workers comp (especially insurance premiums) has firms shopping for states with low premiums and injured workers (with little impairment) unduly benefiting. An example of excessive workers comp is the low cost it provides on the worker's mistakes and consequent perverse incentives. A section from a book review is presented here
Price Fishback writes a five-page essay entitled, “Does Workers' Compensation Make for a Safer Workplace?”

Prior to workers' compensation laws, liability for workplace accidents was based on common-law standards of negligence. Fishback summarizes the legal notion of “due care” on the part of the employer, and explains that the employer often escaped liability because the injured worker had accepted the risks involved, had himself been negligent, or was harmed by a fellow worker's negligence. These doctrines “encouraged common-sense prevention of accidents by the parties with the lowest cost of prevention”—often the workers on the scene. And jobs with high risks commanded high wages.

But between 1910 and 1930 most states passed workers' compensation laws that tended to hold employers liable for all serious accidents “arising out of employment.” Fishback explains that, besides driving down wages and job opportunities, these laws sometimes even increased workplace hazard! In coal mining, accidents actually increased. “Since coal loaders and pick miners were paid by the ton of coal, they saw that by working a little faster and taking more risks they could get higher earnings— even though a roof fall injured or sometimes killed miners who tried to finish loading cars before setting new props for the roof.”

From his detailed learning, Fishback serves up a sort of historical bumper-sticker—workers' compensation had high costs and sometimes did not achieve even its primary goal of inducing workplace safety—and shows how this pertains to current liability issues.
On the other hand there are empirical studies and adequate economic theory explaining the deleterious effects of low workers comp. What interests me is that even libertarians have not gone the whole hog on this issue and have instead asked for state-based decentralization of policy bodies and allowing workers to file cases directly against gross safety negligence by employers (akin to the realm of tort law). Their approach has been to take into costs and benefits of a system including the value of a statistical life.

Workers comp based on economic loss and not non-economic loss. As of now most workers comp is based on compensing the lost ability to compete in the labor market. The evaluation of non-economic costs forms a small part of the overall calculus. And yes, It may be disturbing to Indians that the calculation of compensation is based on a formula that rates the disability (scale of 0-100) caused to your body by the injury.

Given the "what to do" is limited, we turn to the "how to do" ... here is where benchmarking and metrics become important to measure and compare systems. System metrics include adequacy, equity and efficiency. The equity issue is especially interesting. It encompasses both horizontal (similar losses should receive similar benefits) and vertical (different losses should receive benefits proportional to those losses).

Once again, the big picture is the movement (in this case) away from "whether the state or the market should do it" to a more research and empirics based approach to policy-making. Maybe that captures the present state of my thinking drift! Also, I havent been able to find much data or studies in India on this front. I would be glad if somebody passes along a few leads.

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