Hazard Pay Can’t Be Left to the Market

Hazard Pay Can’t Be Left to the Market

“It’s going to disappear.” Maybe the President was right after all. Temporary pay bumps of $2 per hour or more were common at the beginning of the COVID-19 pandemic. Yet, while new infection counts continue to climb in many parts of the U.S., “hero” pay is set to vanish

Are public-facing workers still at risk of infection? Absolutely. But with double-digit rates of unemployment, the bargaining advantage has shifted back toward employers. Like a hurricane reminding us of nature’s destructive power, it is a stark example of the cruelty and injustice that markets can perpetrate.

It is easy to place the blame at the feet of corporate chieftains. But they answer to an overlord, the shareholder, who answers to the king of kings — the customer. The fruit of an economic system built upon self interest is efficiency, not fairness. Congressional proposals seek to mitigate this inequity with Treasury-funded hazard pay of up to $12 or $13 per hour, but swift action is unlikely. The federal government is as inert as the market is indifferent.

Consumers themselves must ultimately shoulder the responsibility of funding hazard pay. The appropriate role of business is more limited, but vital. Employers need to not only measure, monitor, and mitigate occupational risks, they need to facilitate the ability of consumers to give back to the workers they depend on without distorting the ability of the market to meet the needs of the marginal consumer.  

Who Trumps What in Getting Paid for Risk

Let the market decide what is best. Adherents to this belief may see complaints of unfairness as misplaced. After all, businesses did offer their workers more money as the pandemic took hold. Who is to judge whether the amount offered was fair? Economic theory dating back to Adam Smith (1776) argues that unsafe working conditions are naturally regulated by the market for labor. Workers exposed to more dangerous environments, with risk to life or limb, must receive some premium compensation, or else they would choose safer employment. This theory of “compensating differentials” rests upon conditions that limit its power. Most importantly, it assumes that workers have adequate job alternatives. 

Empirical estimates of compensating differentials related to the risk of death in employment vary widely. These estimates are often used by policymakers to determine product and occupational health and safety standards based on the related concept of a statistical life. The melding of compensating differential estimates with mortality risks implies a wide range for the value of a statistical life (VSL) — from virtually nothing to more than $20 million. 

Most studies estimate compensating differentials for entire labor markets, usually at the national level. When the labor market is disaggregated, a more troubling picture often emerges at the lower end of the wage scale. Non-union employees generally receive less compensation for mortality hazards than union employees. The impact of employee bargaining power is also evident through a comparison of VSL estimates across groups with different levels of income. Viscusi and Aldy (2003) find that the log of the VSL varies with the log of income. Every percentage point increase in income was associated with a roughly 0.5 to 0.6 percentage point increase in VSL. Workers with higher average incomes commanded greater pay for the same hazards.

Companies have an incentive to give the most dangerous jobs to those who command the lowest pay, in order to limit their safety-related costs, either in the form of investments to reduce occupational hazards or through higher wages. Robinson (1986) summarizes the rationale, “The level of wage premiums employers must pay per unit of hazard to obtain employees increases rapidly with the number of alternative job options each worker has.”

If the compensation for mortal risks offered by the labor market depends upon your socioeconomic status, it fails any test of justice. If the most dangerous work is yoked across the shoulders of those who are forced to accept the lowest premium for death or injury, all who consume the product or service derived from this labor are engaged in exploitation. Left to the wisdom of the market, those without advantages of education, wealth, or a social safety net are the most likely to be deprived of their right to live. According to Hughes (2019), this might not be morally permissible even if such workers are fairly compensated for the risks they bear. It is clearly wrong if hazard pay is inadequate. 

Giving Back from the Surplus

The market price of goods and services leaves a net benefit, or surplus, to all but the marginal consumer. If mortal danger is involved in its delivery, the value of its avoidance becomes part of the consumer surplus enjoyed. One way to address this exploitation is for each consumer to “give back” some of their consumer surplus to the workers who accepted the risk of illness and death. The appropriate level of giveback would depend on each consumer’s willingness-to-pay to avoid the relevant dangers. 

The findings of Viscusi and Aldy provide an illustrative guide. If an Instacart shopper wants $2 per hour to assume the risk of contracting an infection inside a grocery store, and it takes them one hour to shop for each household, customers could estimate a hazard premium using their relative income. If the Instacart shopper earns $10 per hour, a household earning $25 per hour might be willing to pay roughly $2.50 to $3.00 to avoid infection risk — so their tip should include extra gratuity to reflect it. The hazard premium would be considerably higher for households at the upper end of the wage scale. A household earning $250 per hour (or about $500,000 annually) should be willing to pay $25 to $30 to avoid the same infection risk. 

The role of businesses should primarily be to facilitate the transfer of consumer surplus to exposed workers. Most helpfully, companies could enable customers to make payments into a separate hazard pay fund for the benefit of their workers (or independent contractors). They could also provide customers with occupational risk information, including COVID infection rates, as well as information on any hazard pay already provided at different pay grades. Unlike hazard pay funded by business, acting as a middleman between grateful customers and their workers raises comparatively few competitive concerns.

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