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Estimating the Value of Safety with Labor Market Data: Are the Results Trustworthy?

  • Beat Hintermann

    (University of Maryland)

  • Anna Alberini

    (University of Maryland)

  • Anil Markandya

    (University of Bath and Fondazione Eni Enrico Mattei)

We use a panel dataset of UK workers to look for evidence of compensating wage differentials for workplace risk. Risk data are available at the four-digit industry level or at the three-digit occupation level. We discuss various econometric problems associated with the hedonic wage approach, namely measurement error, instability of the estimates to specification changes, and endogeneity. We find that if we assume a classical measurement error, the true risk signal would be completely drowned out in our data, which would imply a severe downward bias of the OLS coefficient on risk. But this prediction is at odds with our OLS estimates of the VSL, which are large, especially for blue collar workers. Further, the coefficient on risk changes varies dramatically with the inclusion or exclusion of industry and/or occupation dummies, as well as with the addition of nonfatal risk. When we instrument for risk, which we treat as endogenous with wage, and apply 2SLS or a procedure suggested by Garen (1988), we find negative associations between risk and wages for all workers, which is against the notion of compensating wage differentials, or, for blue-collar workers, extremely large VSL figures. Finally, we exploit the panel nature of our data to apply various estimation procedures (the “within” estimator, GLS and the Hausman-Taylor procedure) that correct for unobserved heterogeneity and endogeneity. The coefficient on risk is usually negative and insignificant for the sample of all workers, which once again questions the notion of compensating wage differentials. For blue-collar workers we obtain reasonable VSLs, but the association between risk and wages is not statistically significant. We conclude that if compensating differentials for risk exist, measurement error, other econometric problems, and the changing nature of labor markets prevent us from observing them. We also conclude that models and techniques for panel data that account for unobserved heterogeneity and endogeneity seem more reliable than the techniques typically employed with cross-sectional data.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2006.119.

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Date of creation: Sep 2006
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Handle: RePEc:fem:femwpa:2006.119
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  1. Andrea Baranzini & Giovanni Ferro Luzzi, 2001. "The Economic Value of Risks to Life: Evidence from the Swiss Labour Market," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 137(II), pages 149-170, June.
  2. repec:reg:rpubli:282 is not listed on IDEAS
  3. Siebert, W Stanley & Wei, X, 1994. "Compensating Wage Differentials for Workplace Accidents: Evidence for Union and Nonunion Workers in the UK," Journal of Risk and Uncertainty, Springer, vol. 9(1), pages 61-76, July.
  4. W. Kip Viscusi & Joseph E. Aldy, 2003. "The Value of a Statistical Life: A Critical Review of Market Estimates throughout the World," NBER Working Papers 9487, National Bureau of Economic Research, Inc.
  5. Jason F. Shogren & Tommy Stamland, 2002. "Skill and the Value of Life," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1168-1197, October.
  6. Arabsheibani, G R & Marin, A, 2000. " Stability of Estimates of the Compensation for Danger," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 247-69, May.
  7. Sandy, Robert & Elliott, Robert F, 1996. "Unions and Risk: Their Impact on the Level of Compensation for Fatal Risk," Economica, London School of Economics and Political Science, vol. 63(250), pages 291-309, May.
  8. Leigh J. Paul, 1995. "Compensating Wages, Value of a Statistical Life, and Inter-industry Differentials," Journal of Environmental Economics and Management, Elsevier, vol. 28(1), pages 83-97, January.
  9. Biddle, Jeff E & Zarkin, Gary A, 1988. "Worker Preferences and Market Compensation for Job Risk," The Review of Economics and Statistics, MIT Press, vol. 70(4), pages 660-67, November.
  10. Dan A. Black & Thomas K. Kniesner, 2003. "On the Measurement of Job Risk in Hedonic Wage Models," NCEE Working Paper Series 200306, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Aug 2003.
  11. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March.
  12. G. R. Arabsheibani & A. Marin, 2001. "Self-selectivity bias with a continuous variable: potential pitfall in a common procedure," Applied Economics, Taylor & Francis Journals, vol. 33(15), pages 1903-1910.
  13. Garen, John, 1984. "The Returns to Schooling: A Selectivity Bias Approach with a Continuous Choice Variable," Econometrica, Econometric Society, vol. 52(5), pages 1199-1218, September.
  14. repec:ner:tilbur:urn:nbn:nl:ui:12-4628495 is not listed on IDEAS
  15. Bound, John & Brown, Charles & Mathiowetz, Nancy, 2001. "Measurement error in survey data," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 59, pages 3705-3843 Elsevier.
  16. Hausman, Jerry A. & Taylor, William E., 1981. "Panel data and unobservable individual effects," Journal of Econometrics, Elsevier, vol. 16(1), pages 155-155, May.
  17. Lanoie, Paul & Pedro, Carmen & Latour, Robert, 1995. "The Value of a Statistical Life: A Comparison of Two Approaches," Journal of Risk and Uncertainty, Springer, vol. 10(3), pages 235-57, May.
  18. Garen, John, 1988. "Compensating Wage Differentials and the Endogeneity of Job Riskiness," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 9-16, February.
  19. Mellow, Wesley & Sider, Hal, 1983. "Accuracy of Response in Labor Market Surveys: Evidence and Implications," Journal of Labor Economics, University of Chicago Press, vol. 1(4), pages 331-44, October.
  20. Gegax, Douglas & Gerking, Shelby & Schulze, William, 1991. "Perceived Risk and the Marginal Value of Safety," The Review of Economics and Statistics, MIT Press, vol. 73(4), pages 589-96, November.
  21. Sandy, Robert & R. F. Elliot & W. S. Siebert & X. D. Wei, 2001. " Measurement Error and the Effects of Unions on the Compensating Differentials for Fatal Workplace Risks," Journal of Risk and Uncertainty, Springer, vol. 23(1), pages 33-56, July.
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