Workers' Compensation, Job Hazards, and Wages

Abstract

Competitive theory implies that compensating wage differentials will be paid to workers in hazardous employment, but only to the extent that employees are liable for risk. This prediction suggests that previous estimates of wage-risk premiums may be biased as a result of the failure to control for variations in workers' compensation benefits across states. The authors of this paper test an empirical model of compensating wage differentials that includes a measure of employer liability. For nonunion workers, they find that significant wage premiums are paid for an increased probability or severity of nonfatal injury; a slight downward bias in these estimates results from omitting the liability variable; and increases in employers' costs of workers' compensation are offset dollar-for-dollar by reduced wages. For union workers, however, the evidence on compensating differentials is mixed, and there is no suggestion of a trade-off between wages and the costs of workers' compensation.A WELL-ESTABLISHED prediction of . competitive-wage theory is that workers in jobs carrying a high risk of physical injury will receive a compensating wage premium. The validity of this prediction has important implications for the perceived efficiency of labor markets and, therefore, for the need for regulations such as minimum safety standards and workers' compensation.

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