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.
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.