Wage-Risk Premiums and Worker’s Compensation: A Refinement of Estimates of Compensating Wage Differential - Len M. Nichols with Richard J. Arnould

Introduction:

Thaler and Rosen (1976) were the first to apply hedonic price estimation techniques to the problem of estimating the value of risk. That effort advanced the determination of the value of’ life beyond the traditional methods of estimating the discounted stream of’ future earnings forgone or the discounted value of the net of earnings over consumption. Thaler and Rosen (1976) considered risk to be trans-acted in the market; the market price of’ a unit of’ risk is the wage premium an individual would be willing to forgo to engage in an occupation with a lower probability of death or severe injury. More specifically, the values of all aspects of’ a job are embedded in the wage rate. One of those dimensions is job-related risk. Workers have preferences over risk and wages, and firms have a profit-maximizing willingness to invest in safety that reduces wage demands. The observed phenomena in wage-risk space comprise a double envelope locus of tangencies among workers’ indifference and firms’ offer curves. This market-based locus has been estimated, and the risk coefficient, which measures the amount of wages willingly for-gone to reduce the risk of death or injury, can be extrapolated to determine the implied value of’ life. Various studies using differing samples, risk estimates, and occupational mixes have provided estimates in two rather distinct ranges (Smith 1979). The previous estimates of’ the value of life or injury explicitly ignore various forms of insurance, including workers’ compensation, that should have the effect of reducing the wage compensation necessary to induce an individual to enter a risky occupation (Bailey 1980).

“Wage-Risk Premiums and Worker’s Compensation: A Refinement of Estimates of Compensating Wage Differential,” Journal of Political Economy, v. 92, #2, (April 1983, with Richard J. Arnould).

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