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Role of Workers' Compensation in Developing Safer Workplaces

By Chelius, James R. | Monthly Labor Review, September 1991 | Go to article overview

Role of Workers' Compensation in Developing Safer Workplaces


Chelius, James R., Monthly Labor Review


The 75th anniversary of the Federal Employees' Compensation Act (FECA) is an opportune time to reflect on broad policy issues of no-fault work injury liability statutes. Policy discussions regarding occupational safety and health usually are divided into two distinct parts with (1) government standards established under the Occupational Safety and Health Administration (OSHA) as the regulatory device for encouraging prevention and (2) workers' compensation considered as the program for providing benefits to disabled workers. (1) However, the much debated standards approach established under the Occupational Safety and Health Act draws attention to the role of workers' compensation as a part of the policy mix for improving the health and safety of employees.

General issues of safety and health and their effect on employers and employees are first considered in this article. Then the mechanics of determining workers' compensation benefits in the private sector and how this process relates to employer prevention incentives are briefly reviewed. Evidence on the effect of workers' compensation on safety and health is also discussed. Finally, the specific arrangements by which Federal agencies are charged for the work injury liabilities of their employees are compared with arrangements used in the private sector to determine whether the Federal arrangements are consistent with the objective of encouraging prevention of injury and illness.

Safety and health

Although accidents and disease are probabilistic events, the frequency of occurrence and the seriousness of their outcome can, to a large extent, be controlled by the preventive efforts of both employers and employees. One widely-held view is that the unregulated economic relationship between employer and employee does not contain sufficient incentives for employer investments in prevention. This is seen as a classic externality--the employer bears the costs of prevention while employees enjoy greater safety. Therefore, the employer is presumed to spend less on prevention than is socially desirable because he or she does not receive the full benefits of prevention.

Another view is that an employer does profit through the use of preventive measures because employees will be inclined to work for less pay in safer work environments. Empirically, there do appear to be such "compensating differentials" for risk, although there is no standard to determine if these differentials fully reflect work hazards. (2) If workers are not fully informed about workplace hazards or if there are obstacles to a smoothly-functioning labor market such as immobile workers, the wage differentials based on risk will not reflect the full danger, and therefore not create a sufficient prevention incentive. (3)

The debate over the adequacy of market-based incentives need not be resolved to justify consideration of the role of workers' compensation in accident and disease prevention. With society's consensu that disabled workers should receive compensation, there will most likely be some sort of mechanism that pays injured workers. Given that such a program will exist, and that under any market or regulatory scheme--even if they are functioning perfectly--there will be some injuries or diseases, the issue is how the program's finances can be structured so as to optimize the amount of prevention.

The manner of financing compensation to disabled workers can be thought of as a continuum from general to specific. At one extreme are countries that do not differentiate between work- and nonwork-related disabilities, with compensation considered a part of the social welfare system. Other countries isolate work injuries, but charge all employers a flat percentage of payroll fee, while some base employer fees on the riskiness of industries. In the United States, as well as in many other countries, employer charges are based on industry classifications (with some attention to occupational mix) and the individual firm's experience with accident and disease claims.

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Role of Workers' Compensation in Developing Safer Workplaces
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