Safety preferences

By Eric Crampton 06/05/2013

Economists know a few things. Among the things I think we know:

  • People generally require compensation to take on a known risk of death or injury: safety is a good for most people;
  • As people get richer, they require more compensation to take on a risk of given size: safety is a superior good;
  • Risk-tolerance is heterogeneous across individuals, and not simply because of differences in income: some people are better able to manage risks or incur fewer psychic costs in thinking about downside costs of risk.
  • Observations that some individuals engage in a risky activity for little compensation could be evidence that they are poorly informed, or it could be evidence that they have a high tolerance for risk.
Matt Yglesias argues that we should avoid policy overreactions to the recent and tragic factory collapse in Bangladesh. We expect more on-the-job deaths in poorer countries even in cases where there is perfect knowledge among workers about risks; poorer workers prefer total compensation bundles with higher monetary income and fewer on-the-job amenities like safety.
It may look on the surface like Yglesias is being all ‘realist’ and ‘sensible’, but in fact he gets the economics wrong. He forgets three things:
  • preferences are only half the story. The other half is the choice space in which preference can be expressed. It is the combination of preferences and available options that lead to the choices made. Ascribing the choices to preferences alone gets the theory wrong; one can just as legitimately point to the limited options

While that’s true, surely the options available are endogenous to local effective preferences. If effective demand among local workers were for a total compensation bundle that included more safety and lower wages, and if it were no more expensive for the firm to provide that kind of bundle than to provide the less-safety-higher-wages bundle, they’d wind up providing it. It could take a while – if safety is largely contingent on prior fixed plant investments and if plants have a relatively long life, it would be hard for workers to change things at existing factories. But it would also be hard for anybody else to effect that change.

  • the market theory that Yglesias uses to underpin his ideas — that there are market transactions deciding the prices of garments and safety — assumes freely available and perfect information. A large economic literature then explores the impact of relaxing that assumption. But that’s the post-grad course, and Yglesias is stuck in 101. Here’s the thing: we could make it perfectly obvious to Western consumers how their garments were made, what the working conditions were. Then we could talk about a market solution. Let me put it another way: is Burger King going to launch a horse-burger because people were buying them before they found out what was in them?

Let’s take the case of imperfect information among workers first as I think it’s the more serious one. Suppose that workers trust in that the existing government regulations around safety form a binding floor on the level of safety that a firm can provide, but that the owners chisel by bribing officials in ways not noticed by workers. Then, the workers are effectively accepting a lower total compensation bundle than they thought that they were being provided. Bill links to plenty of evidence that the factory owners in this case were up to all kinds of shenanigans.

What do we expect might work in this state of the world?

  • Asking Bangladesh to increase its building standards is unlikely to have much effect where the quality of governance is too poor to enforce the current standards; asking Bangladesh to improve its generalised quality of governance may not be far from asking for unicorns. Improved governance would be great, but we have no good general handle on how to achieve that.
  • Local workers will discount existing building codes and government regulations and perhaps demand more direct and credible signs that the expected level of safety is being provided. I’m not here suggesting that a local worker can go up to the company owner and demand things; rather, a factory opening up next door showing with credible evidence of stronger standards will hire away workers where workers have effective demand for safety. 
    • This could yield a market in external certification, but it could be tough to establish. You need somebody that the workers trust to provide the certification, who is competent to do it, and whose officials are less corruptible than state workers. It’s far from impossible, but I’m not sure it’s easy.
  • If local certification options don’t pan out, this is actually a spot where Western retailers could help out. Western retailers can enforce standards among manufacturers through spot-checks and the like, and they’re credible. But what should they enforce?
    • If you think that the main problem is that owners lie to workers about existing safety standards but that workers are otherwise competent to choose safety-salary bundles, you want the retailers not to be enforcing minimum safety floors but rather to be providing accurate information to workers about real safety risks and about safety conditions in other potential places of employment. Putting in minimum safety standards risks worsening the lot of workers who legitimately would choose less safety and higher salaries.
    • If you think that the main problem is that poor foreign workers cannot adequately judge safety risks, you want the retailers to put in a minimum safety standard using their best estimate of what well-informed poor workers would choose. I worry that these kinds of standards wind up instead embedding a lot of Western wishful thinking; I also worry that rich country lobbyists have strong incentive to push for standards that work to raise their rivals’ costs rather than to improve the lot of workers. 
I’m not sure that there’s any particular net market failure caused by imperfect information among Western consumers. My basic model has two offsetting effects: consumers don’t really know what goes into the sausage, but they’re also prone to believe that banning sweatshops leads to kids in schools rather than kids in malaria-ridden fields or in garbage dumps. It is way way easier to get Western consumers outraged about working conditions in third world countries than it is to get them to think hard about policies that might do more good than harm. And first-world manufacturers and unions are quick to jump in with entrepreneurial policy proposals that look nice while raising rivals’ costs.

And so I worry about the risk of making workers in third world factories worse off as they see things. I’m sure Bill worries about that too; we may just be disagreeing on how far above the ideal floor any minimum-standards campaign would wind up pushing things. 

0 Responses to “Safety preferences”

  • Interesting argument.

    Does your contention on the sanctity of the wage/safety tradeoff apply in Pike River?

    Or only in the third world?

    • It depends on workers having reasonable expectations about the risk that they’re taking on. I don’t think that held at Pike because we were there in a bit of a worst-case regulatory environment: the government assures everyone that the regs are tight and that things are safe, so workers don’t have to do their own due diligence, but the government then didn’t seem to actually enforce anything. Workers expect that the minimum level of safety is acceptable because of the regs, but the regs aren’t enforced….

  • The Pike River workers (including the supposed site safety manager) claimed to know the various safety shortcomings of the site. They explained (post hoc…) the regular failings of the air handling system, their concerns about the escape shaft, etc etc.

    The records show that the site safety manager, whose own son died in the mine, regularly brought up the shortcomings of the mine’s safety systems with management. He knew the regs and knew they were not being enforced. He also stated that he (and so by extension the rest of the workforce) had no faith in the compliance regime.

    And yet, this man allowed his son to work in that environment.

    Granted, the miners accepted this known high level risk for some reason, but are you seriously suggesting that this man knowingly accepted the additional significant, real and present risk he knew of in a tradeoff for cash? Further, that he did so on behalf of his son as well?

    I suspect the presence of a load more externalities than have been discussed by either yourself or Bill..

    Just as an addendum, safety research regularly shows that humans discount the likelihood of harm arising from a hazard (at the individual level) We are poorly designed for making risk assessments it seems. Knowing this, even perfect knowledge of risks by an individual would be unlikely to bring balance to the risk/compensation decision.

  • I don’t know how high an additional risk the safety manager estimated or how well those risks were understood by the other workers.

    But if the workers knew the risks they faced and accepted those risks as part of the job, I can’t see how I’m in a place to second-guess those decisions.

  • Answer to #1 – clearly not high enough

    Answer to #2 – I look forward to you supporting Deerhunter-like russian roulette for money on the same basis.

    All of which is not to argue with your core thesis – that its incredibly hard to change behaviour in other countries, let alone in a poor, semi-industrialised autonomous state like Bangladesh.

    I am actually struck by the similarities in the CTV Building / Bangladesh Clothing Factory situations, which probably would have been a better comparison…

    • Agreed CTV is the better comparison.

      While I think your Deerhunter scenario should be regulated rather than banned (ensuring that all participants are willing volunteers, etc), it doesn’t get onto my “Top-10,000 things that need fixing” list.

  • One of the main reasons for requiring high hazard industries to have separate safety channels to senior management ( instead of via operational managers ) is to ensure that corporate management takes responsibility for creating an acceptable safe working environment, and can’t claim ignorance of the hazard.

    I’ve never worked for a NZ employer who would, on their own initiative, accurately assess workplace hazards and consequent risk. There usually is an information deficit when subtle hazards are present, and good luck or common sense keeps many NZ workers alive.

    Given choice, workers will often accept increased wages for hazardous work based on perceived risk, rather than actual risk.
    Workers seldom have the “perfect information” requirement for risk assessment, as that includes understanding the hazard.

    Most people aren’t capable of assessing chemical hazards, such as coal outgassing, and rely on the company to assess the risk and provide a safe workplace.

    ACC levies were intended to induce good corporate behaviour, but if the management suggests workplaces are safe, workers only have two choices, resign or chance it. Some workers at Pike River resigned because they thought the risk was too great, but they had come from other mines and knew best practice.

    At Pike River it seems that management made ill-informed decisions simply based on cost benefit and efficiency, rather than industry best practice. The regulators were unskilled and overworked, and apparently weren’t prepared to override Pike River’s safety decisions, even when the hazards were recognised.

    Apple, Nike, and other corporates have required suppliers to reduce hazards and workplace injuries, because workers dying due to corporate cost cutting is unacceptable to most 21st century consumers and shareholders.

  • The problem with charging managers and directors after the fact is just that – it is after the fact.

    Short of getting all Old Testament on their asses, its also hard to identify a penalty regime (including levies) that might truly reflect the magnitude of the responsibility they have shirked.

    Additionally, we are witness weekly to the tendancy of short term imperatives to get in the way of medium and long-term best practise. This is true in all areas of life – driving a car for example where we will “bend” laws and best pratice because we are late, its wet and cold etc. No less so in business. This is consistent with the harm discounting behaviour I described above.

    I have no faith that a business owner, generally driven by a short term financial imperative, would voluntarily lead a best practise safety system. They will discount what they perceive as an unlikely outcome and emphasise the immediate rantings of the bank manager and/or shareholders.