ECON 3350 LC 5- Value of Life

See lecture for many important graphs!!!

...

Is Human Life Invaluable?

We can prove by contradiction that it is not • Speeding, ignoring seat belts, smoking, and taking risky jobs • Every day we consider trade-offs between health and other goods.

Advantages of the CFOI (continued)

• Advantages of the CFOI: • Diverse background characteristics • Comprehensive census of all job-related fatalities • Fatalities are verified using multiple sources of information • Details about nature of accident and type of injury • Risks can be calculated not only by industry but also by occupation within industry (here: for ages 16-64, years 2003-08) • To avoid measurement error researchers avoid too narrow splits. Researchers used 50-72 industries and about 10 major occupations • See the next slide for an illustrative set of 10 industries and 10 occupations

Examples of Government's Opportunities to Reduce Risk

• Airplane cabin fire protection, $200,000 • Automobile side door protection, $1.3 mln • Occupational Safety and Health Administration (OSHA) asbestos regulations, $89.3 mln (> $55 mln, the GDP per fatality!) • Environmental Protection Agency (EPA) asbestos regulations, $104.2 mln • Proposed OSHA formaldehyde standard, $72 bn

Is Human Life Invaluable? (Continuation)

• An overestimation may lead to adoption of regulations with low benefit-cost ratio, which are inefficient spending of public money (see next slide) • Paradoxically, in some less developed countries invaluable life rhetoric signals low valuation of human life by the government • Imagine citizens demand compensation from the government for some fatal accidents caused by government's incompetence or negligence • Government uses invaluable life rhetoric to pay nothing or pay some small ad hoc sum • It is impossible to compensate for the loss of something invaluable

A Substantial Role of Wealth

• As safety is a normal good, richer people should be willing to pay more for safety • Viscusi and Aldy (2003) based on 50 wage-risk studies: VSL has income elasticity 0.5-0.6 • More recent studies based on CFOI data indicate that income elasticity exceeds 1 (Kniesner, Viscusi, and Ziliak, 2010, Evans and Schaur, 2010) • The DOT now uses income elasticity of 1.0 to split the difference between the previous median estimates and new estimates based on panel data • A consequence of the effect: people in low-income countries value their life less than people in high income countries

Consumer's problem (Slide 17 equation)

• Choose a job with fatality level p that provides maximal utility • The larger the difference in the numerator, the larger the value of life • The stronger utility depends on wage, the smaller the value of life

WSL by Race and Ethnicity

• Conventional model: all workers make choices over the same available jobs • In fact, markets are fragmented • Evidence that minorities especially Mexican immigrants who do not speak English tend to get lower compensation for the same risk

Value of Statistical Life (VSL)

• How much life of a particular individual is worth? • Hard to answer • Most policy decisions can be made based on the VSL instead • VSL = how much people are willing to pay (on average) for a small reduction in their risk of death • Knowing the VSL we now can calculate how much certain safety policy is valuable to people

Difficult Questions VSL

• How to value lives of young children? • They make no choices of risky jobs, cars, houses, or smoke detectors • How to value lives at old ages? • A retired person makes no risky job choices, so harder to measure the value of life • Does a frail person enjoy life the same as a perfectly healthy person? • Method of adjustment: use Quality-Adjusted Life Years (QALY)

Empirical Results

• Labor market-based results are considered to be most accurate • The best dataset is the Census of Fatal Occupational Injuries (CFOI) • Viscusi (2013, M. Labor Rev.) summarized all labor market VSL studies that have used the CFOI • Meta-analysis by Viscusi reveals the median estimate of VSL=$9.3 mln • This is a number for an average US person • The US Department of Transportation also used the CFOI-based studies and adopted VSL=$9.2 mln (DOT Memo, 2013) • (The DOT uses an average VSL across 9 CFOI-based studies)

Two Interpretations of the Value of Life

• Let the probability of death from some specific risk be 1/10,000 • Let a number people are willing to pay $900 each for eliminating this risk of death • Two ways to derive the value of life from these data: 1. How much do people spend in order to save exactly one life? 10,000 people will pay $ 900 each spending $ 9 million in total. • They prevent one expected death by choosing to pay $ 9 million • Equally, the value of a statistical life is worth $ 9 million 2. How much does a person pay per unit of risk? • Each person pays $ 900 for a risk of 1/10,000 • $ 900 /(1/10,000) = $ 9 million per unit risk of death

Advantages of the CFOI

• Limitations of previous studies: • Measurement error in mortality risk • Unaccounted heterogeneity in fatality risk for different workers in the same industry (people used overall mortality per industry) • Omitted variable bias (missing controls)

Understanding the Value of Life

• Much of the controversy can be explained by misunderstanding of the subject. • The term is misleading. • Since life is finite, this is rather the value of remaining years of life • Q: How to measure the value of life? • Is value of life equal to a discounted stream of future earnings? • How about directly asking people how they value their lives? • By "value of life" economists mean the value of statistical life (VSL), a technical term

Quality-Adjusted Life Years

• One QALY is equivalent to one year of life of a perfectly healthy person • One year of life of a sick person is considered to be worth less than one QALY • Measuring cost per QALY is typical for evaluating health interventions • Health intervention that prolongs healthy life is more valuable than intervention that prolongs unhealthy life

Value of Life (In General)

• One of the most controversial topics in economics • At the same time, a concept of considerable practical importance • Extensively used by the US Government for decision-making regarding investments in environment protection, health care, road traffic safety measures etc. • Extensively used by courts to decide compensation after fatalities • Ignoring the estimated valuation of life would lead to severe consequences • Under- and over-investments in certain safety and health

Why does measured willingness to pay for life extension is about the same for healthy people and disabled people?

• Possible effects in different directions • The disabled may value their life less (-) • Low opportunity cost: paying for health implies less forgone consumption for them (+) • Option value: benefits from the future R&D (+)

QALY Continued

• QALY is widely used but controversial • Contra: QALY determines which category of patients will receive better treatment (diseases of different types do not get equal R&D) • Pro: since resources are limited, the real question is what allocation of resources is optimal for the society • Danger: since sick people adjust to their illness, outside observers may underestimate their true value of life. You need to the the valuation of sick people themselves.

Are Sick People Willing to Pay Less?

• Sick people would rather live shorter but healthier life • Paradoxically, measured willingness to pay for life extension is about the same for healthy people and disabled people

Non-Labor Market Evidence

• Smoke detector installation • Housing prices in polluted areas • Automobile Prices (the most reliable evidence) • Same methodology as for the VSL • Similar estimates

Measuring Quality-Adjusted Life Years

• Surveys of people who are sick • Visual scale: ask respondents directly about quality of life compared to perfect health (0-100%) (most subjective) • Time trade-off: ask respondents whether they would rather be as sick as they are for some time or be healthy but with shorter life expectancy • Standard gamble: ask respondents whether they wish to take a gamble: remain in poor health or go through treatment with two outcomes: death or perfect health

Does the Government face similar value of life tradeoffs?

• The government adopts health, safety, and environmental regulations • Limited resources: if the entire US GNP were devoted to fatal accidents, we would spend $55 mln per fatality • A trade-off between saving lives and other government spending

Non-Fatal Job Injuries

• The same methodology can be applied to job injuries • Workers value expected injuries at $20,000-$70,000 per expected injury • E.g., for an injury with probability 0.02 per year workers will ask additional $400-$1,400 ($1,400=$70,000 · 0.02) • Women and men working at hazardous jobs have similar valuation of injuries • People who smoke or do not use seat belts value expected injuries less • Markets efficiently match people to jobs according to their preferences • People who value injuries more (by absolute value) end up in jobs with smaller chances of injuries

WSL by Gender

• WSL estimates for women are somewhat lower than for men • Women usually face much lower mortality risks than men • Estimates for women have lower precision than for men • Government agencies assume that men and women have the same value of life

Empirical Results: Strong Self-Selection

• Workers at high risk jobs have low values of life (self-selection) • Estimated values of life for workers at average risk jobs are several times higher than for those at very risky jobs • Examples of Risky Jobs: cutting trees, fishing, coal mining, construction