THE EMPLOYMENT AND SAFETY EFFECTS OF EMPLOYERS‘ LIABILITY*
| Published date | 01 November 1982 |
| DOI | http://doi.org/10.1111/j.1467-9485.1982.tb00453.x |
| Date | 01 November 1982 |
Scottish
Journal
of
Political
Economy.
Vol.
29,
No.
3,
Novernbcr
1982
0
1982
Scottish Economic
Society
0036-92Y2/82/00lSo2S6
$02.00
THE EMPLOYMENT AND SAFETY EFFECTS
OF
EMPLOYERS’ LIABILITY”
CENT0
G.
VELJANOVSKIt
Centre for Socio-Legal Studies, Woifson College, Oxford
I
INTRODUCTION
During the nineteenth century the common law of employers’ liability
effectively insulated the employer from the burden
of
the losses inflicted on his
workers
by
industrial accidents.’ The court’s approach to the regulation
of
industrial accidents was dominated
by
the economic theory
of
laissez faire,
which the judges interpreted as demonstrating that the unrestrained market
would satisfactorily resolve both accident prevention and compensation goals.
Towards the end of the nineteenth century this view lost favour and with its
decline came a mounting volume of legislation that both altered the common
law and directly regulated industrial safety and accident compensation
schemes. The financial impact
of
these reforms was to make the employer
legally liable for an increasing proportion
of
his workers’ accident losses.
Economists have generally accepted the popular justifications for em-
ployers’ liability. It is widely assumed that workers on the whole are
ill-
informed of the risk they agree to run when they accept employment in
dangerous jobs and that employers are in a superior position to affect
improvements in the level of safety. If workers underestimate the risks
of
industrial accidents it implies both that the level
of
employment and the
accident rate in hazardous industries are inefficiently high relative to the
market outcome when information is perfect. The economic case for
employers’ liability is that it remedies these two inefficiencies by making the
more knowledgeable party liable for the losses. However, it is
not
obvious why
workers should be the only ones who are imperfectly informed. Employers
may also lack information, particularly as to the accident proneness and the
*
I
am
indebted to the following for their helpful comments on earlier drafts
of
this paper: Paul
Burrows,
Don
Dewees, Henry Hannsman, William Landes, Chris McKenna, Richard Posner,
Sam
Rea, Alan Williams and participants at workshops/seminars at the Universities
of
Oxford,
Chicago, Pennsylvania, Western Ontario and the London School
of
Economics.
t
Research Officer, Centre for Socio-Legal Studies, Oxford; Junior Research Fellow
of
Wolfson
College,
Oxford
University; Visiting Professor, Faculty
of
Law, University
of
Toronto.
This is not strictly correct. During the heyday
of
the common law of employers’liability
(1830-
80)
in England the employer had a duty to employ competent servants and not
to
be personally
negligent.
See
Veljanovski
(1982)
for
a detailed analysis
of
the English employers’ liability during
this period.
Date
of
receipt
of
revised manuscript:
19
February
1982.
256
EMPLOYMENT AND SAFETY EFFECTS
257
injury severity
of
individual workers. For example, workers may be physically
identical to all outward appearances, yet suffer markedly different losses when
injured. An example of this is the so-called “egg shell” skull cases where
otherwise normal persons sustain severe head injuries because they have
unusually thin skulls.
In this paper the theoretical examination of no liability and employers’
liability begins by assuming that it is the employer, not the worker, who is ill-
informed. The impact of both liability rules on employment and safety is
examined and it is concluded that neither rule can achieve full Pareto-
efficiency. This result illustrates the general proposition that in order to
control two policy variables at least two policy instruments are needede2
Liability rules only regulate safety (care levels) and therefore leave employ-
ment (activity levels) free
to
adjust in a way that may offset the initial efficiency
gain. The model builds on Akerlof‘s (1970) analysis and adds to the recent
economic literature on liability rules that distinguish between care and activity
levels (see Polinsky, 1980; Shavell, 1980).
I1
THEORETICAL
ANALYSIS
(a)
The Coase Theorem
It is generally accepted that liability laws do not have allocative con-
sequences in perfectly competitive markets. This proposition, which is known
as the Coase Theorem (Coase, 1960), implies that when workers bear their own
loss
this is reflected in a higher wage and workers as a group determine the
level of safety by “bribing” the employer to improve job safety via reductions in
their reservation wage. Provided that labour markets are competitive and
workers are fully informed, the market outcome will be Pareto efficient. Also
changes in the law do not have redistributive effects: the
real
income of
workers is unaffected by the law. The law only changes the form of the worker’s
risk (=accident) compensation from a wage premium to a damage award or
employer financed accident compensation. Since the worker is assumed
to
be
indifferent to the form in which he receives his compensation the wage rate will
fall (in the long run) to fully offset the increased compensation costs of the
employer. Thus under both liability rules workers are fully compensated,
employer’s labour costs unaffected, and, by implication, the level
of
job safety
will be invariant to liability rule changes.
In the frictionless world of the Coase Theorem no cases would come
to
court
if
liability were clear and negotiable. Under employers’ liability the employer
would indemnify his workers against injury in a similar manner to the practice
of contracting-out that occurred after the English
Employers’ Liability
Act
of
1880, thereby saving legal costs. In fact the practice of contracting-out was
*
For
a
discussion
of
this in
the
eontext
of
tort
law
see
Birmingham
(1970).
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