The Political Economy of Workers' Compensation in the Early Twentieth Century

By Fishback, Price V.; Kantor, Shawn E. | NBER Reporter, Winter 1994 | Go to article overview
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The Political Economy of Workers' Compensation in the Early Twentieth Century

Fishback, Price V., Kantor, Shawn E., NBER Reporter

Over the last century the United States and many other countries have implemented a wide variety of social protection programs, including health care coverage for the poor and elderly, Social Security, unemployment insurance, and workers' compensation. The first large-scale social insurance program in the United States was workers' compensation, which was introduced at the state level during the 1910s. Workers' compensation shifted the tort rules governing workplace accidents from negligence liability to a form of strict liability whereby the employer was expected to replace up to two-thirds of a worker's lost earnings for all serious accidents occurring in the workplace. This change in the liability rules led to a substantial rise in the post-accident benefits that injured workers received.

Like many other social insurance programs, the modern workers' compensation system has been plagued by escalating costs.(1) Numerous reforms have been offered, including shifting more of the financial burden of workplace accidents onto workers. In an effort to illuminate the public debate over workers' compensation, our research has two main objectives. First, we hope to improve the understanding of the economic effects of the law's adoption in the early twentieth century, so that policy-makers will realize the consequences of reversing the trend toward more generous accident compensation for injured workers. Second, in our historical investigation of the original purposes of enacting workers' compensation in the 1910s, we wish to point out some of the potential pitfalls of returning to a form of negligence liability in which workers would be held more financially responsible for their workplace accidents.

In their time, progressive reformers hailed workers' compensation widely as a financial boon for injured workers, providing them and their families substantially higher and more certain post-accident benefits than they would have received under the negligence liability system. Under negligence liability around the turn of the century, relatively few workers received awards in court. Since a court decision could take up to five years, and the outcome was always highly uncertain, most injured workers or their families accepted out-of-court settlements. Because the employer was not legally compelled to pay anything if he had not been negligent, roughly 43 percent of the families of fatal accident victims received no payments prior to workers' compensation.(2) The mean levels of compensation for all families of fatal accident victims ranged from about 58 percent of a year's income to 112 percent.

By contrast, when workers' compensation was enacted in various states after 1910, nearly all workers' families received compensation. The average compensation ranged from about two to four times annual income, depending on the state. Social reformers saw workers' compensation as a great victory for workers, presuming that the sharp rise in post-accident benefits actually represented a redistribution of income.

However, increases in employer-mandated benefits often led to large enough wage declines to pay for the increase in expected benefits fully.(3) Our analysis of the coal mining, lumber, and construction industries in the early twentieth century suggests that nonunion workers essentially "bought" the more generous and more certain benefits mandated by workers' compensation laws through lower real wages. Union workers, on the other hand, experienced much smaller wage offsets.(4)

Wage Offsets

We constructed three panel datasets that included the primary occupations in the coal, lumber, and unionized building trades industries, for over 20 states from 1907 to 1923. Our regression results imply that workers in the nonunionized lumber industry experienced roughly a dollar loss in annual earnings for each dollar increase in expected accident benefits that workers' compensation promised. In the nonunionized sector of the coal industry, the offset was larger, at about two to three dollars for each dollar increase in expected benefits.

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