This was a very informative read. One thing I’ve been wondering about a lot lately is to what extent innovation relies on exploiting unpriced externalities, and I think this piece provides a good example.
As you note, the key issue is that safety in a factory involves externalities, and the workman’s comp laws effectively internalized the cost of those externalities to the firms. If the workman’s comp laws had been in place from the beginning (or if the externalities had otherwise been internalized from the beginning), how would that have changed the course of innovation and technological progress? Would innovation have slowed down, or would we have missed out on some innovations altogether, because it would have been too costly for firms to operate when they were fully internalizing all their external costs from the beginning?
I’ve mostly been wondering this in the context of pollution, but I think it applies to worker safety too after reading this.
Are these externalities, in the relevant sense? The cost is to the workers, and the workers are at the table—we might expect them to demand more money in exchange for the job being dangerous. So modeling this as “internalizing externalities” feels like a weird fit.
On the other hand, given that the workers actively resisted safety measures… I dunno.
I think of “externality” as roughly equivalent to “you hurt someone and you didn’t have to pay for it.” If a workplace is neglectful of safety, and the worker gets hurt, and the employer doesn’t have to pay, that seems like an externality?
Caveat that I’m not an economist, but my sense is that’s not a great way to think about externalities.
The problem is, what does it mean to “pay for” something? If I buy a bag of chips, did I pay 50¢ for the taste and feeling of satiation, and also get an increased risk of heart disease? Or did I pay “50¢ plus increased risk of heart disease” for those things?
If people who went to work in a steel mill knew that it had a higher risk of dying than other jobs that were available, maybe they decided that they were being fairly compensated for the risk of death? (Even if they did decide that, that doesn’t mean these changes were bad.)
Wikipedia has it that an externality is “a cost or benefit for a third party who did not agree to it”. (Benefits come from e.g. vaccines, where I might get one for selfish reasons but it happens to protect those around me.) In this case, there might be a question about whether the steel workers agreed to the cost, but they’re not a third party.
And whether they’re a third party matters, I think, because if we decide there’s an unfair outcome happening, the tools available to us depend a lot on whether the person being harmed gets a say in the matter. Things like nutritional info, energy ratings, “smoking causes lung cancer” warnings, are ways to help people decide what is or isn’t worth it for them, but they mostly only help the person deciding whether or not to buy something. (“Mostly” because health and energy usage do have their own externalities.) If we want to help someone who doesn’t get a say in the transaction, we apply different tools, like taxes and regulation.
(I guess I’ve changed position from my previous comment, I now just think “no, this isn’t an externality”. Workers resisting safety measures is important, like it feels like the kind of thing that if you apply economic tools to make predictions it’s not at all what you’d expect and it seems like this points at an important limitation of economic tools. But that doesn’t turn this into an externality.)
I guess thinking of this in terms of externalities maybe isn’t quite right. It might be more useful to say that system-level safety is a public good, since, for all the workers in a particular firm, safety would be non-rival (one worker benefitting from a safety measure doesn’t prevent other workers from benefitting) and non-excludable (nobody can exclude a particular worker from benefitting from the system-level safety measures).
Each worker only has an incentive to look out for their own safety, not to implement any system-level safety measures. Before the workman’s comp laws, firms also didn’t have an incentive to provide the system-level safety public good—the cost of providing it must have outweighed the benefits to the firm. The workman’s comp law then shifted the cost/benefit ratio of providing the system-level safety public good enough to make firms start providing it.
This mental model seems to line up with a couple observations from the essay: First, workers resisted some safety measures when they had to bear some of the costs of providing the public good by changing their working styles. They were probably especially resistant if they felt that the marginal cost they personally bore in providing the good was greater than the marginal benefit they received from it. Second, larger firms would have higher benefits from providing this public good (or higher costs of not providing the good), which is why they led the way on implementing system-level safety programs.
I don’t think it would have significantly slowed things down. I think the costs to employers went from like a fraction of a percent of payroll to a few percent. It was a big relative increase, but still a fairly small cost overall. But it was just big enough to make them say “we should have a safety department.”
This was a very informative read. One thing I’ve been wondering about a lot lately is to what extent innovation relies on exploiting unpriced externalities, and I think this piece provides a good example.
As you note, the key issue is that safety in a factory involves externalities, and the workman’s comp laws effectively internalized the cost of those externalities to the firms. If the workman’s comp laws had been in place from the beginning (or if the externalities had otherwise been internalized from the beginning), how would that have changed the course of innovation and technological progress? Would innovation have slowed down, or would we have missed out on some innovations altogether, because it would have been too costly for firms to operate when they were fully internalizing all their external costs from the beginning?
I’ve mostly been wondering this in the context of pollution, but I think it applies to worker safety too after reading this.
Are these externalities, in the relevant sense? The cost is to the workers, and the workers are at the table—we might expect them to demand more money in exchange for the job being dangerous. So modeling this as “internalizing externalities” feels like a weird fit.
On the other hand, given that the workers actively resisted safety measures… I dunno.
I think of “externality” as roughly equivalent to “you hurt someone and you didn’t have to pay for it.” If a workplace is neglectful of safety, and the worker gets hurt, and the employer doesn’t have to pay, that seems like an externality?
Caveat that I’m not an economist, but my sense is that’s not a great way to think about externalities.
The problem is, what does it mean to “pay for” something? If I buy a bag of chips, did I pay 50¢ for the taste and feeling of satiation, and also get an increased risk of heart disease? Or did I pay “50¢ plus increased risk of heart disease” for those things?
If people who went to work in a steel mill knew that it had a higher risk of dying than other jobs that were available, maybe they decided that they were being fairly compensated for the risk of death? (Even if they did decide that, that doesn’t mean these changes were bad.)
Wikipedia has it that an externality is “a cost or benefit for a third party who did not agree to it”. (Benefits come from e.g. vaccines, where I might get one for selfish reasons but it happens to protect those around me.) In this case, there might be a question about whether the steel workers agreed to the cost, but they’re not a third party.
And whether they’re a third party matters, I think, because if we decide there’s an unfair outcome happening, the tools available to us depend a lot on whether the person being harmed gets a say in the matter. Things like nutritional info, energy ratings, “smoking causes lung cancer” warnings, are ways to help people decide what is or isn’t worth it for them, but they mostly only help the person deciding whether or not to buy something. (“Mostly” because health and energy usage do have their own externalities.) If we want to help someone who doesn’t get a say in the transaction, we apply different tools, like taxes and regulation.
(I guess I’ve changed position from my previous comment, I now just think “no, this isn’t an externality”. Workers resisting safety measures is important, like it feels like the kind of thing that if you apply economic tools to make predictions it’s not at all what you’d expect and it seems like this points at an important limitation of economic tools. But that doesn’t turn this into an externality.)
I guess thinking of this in terms of externalities maybe isn’t quite right. It might be more useful to say that system-level safety is a public good, since, for all the workers in a particular firm, safety would be non-rival (one worker benefitting from a safety measure doesn’t prevent other workers from benefitting) and non-excludable (nobody can exclude a particular worker from benefitting from the system-level safety measures).
Each worker only has an incentive to look out for their own safety, not to implement any system-level safety measures. Before the workman’s comp laws, firms also didn’t have an incentive to provide the system-level safety public good—the cost of providing it must have outweighed the benefits to the firm. The workman’s comp law then shifted the cost/benefit ratio of providing the system-level safety public good enough to make firms start providing it.
This mental model seems to line up with a couple observations from the essay: First, workers resisted some safety measures when they had to bear some of the costs of providing the public good by changing their working styles. They were probably especially resistant if they felt that the marginal cost they personally bore in providing the good was greater than the marginal benefit they received from it. Second, larger firms would have higher benefits from providing this public good (or higher costs of not providing the good), which is why they led the way on implementing system-level safety programs.
I don’t think it would have significantly slowed things down. I think the costs to employers went from like a fraction of a percent of payroll to a few percent. It was a big relative increase, but still a fairly small cost overall. But it was just big enough to make them say “we should have a safety department.”