Is Safety Cheaper?

In a Randian world (think Paul or Ayn), government regulations are a drag on individual liberty and creativity, an economy-killer, the antithesis of the rugged American entrepreneurship. In the real world, government oversight can make the workplace safer, and cheaper to run – so says a    researcher at that bastion of liberalism, the Harvard Business School.

In the May edition of Science, Michael Toffel, and his colleagues David I. Levine of the University of California Berkley, and Matthew Johnson of Boston University, presented the results of a data analysis of 409 California companies, selected from industries with high injury rates for random inspections by the state’s Division of Occupational Safety and Health. The trio found that inspections actually resulted in a 9.4 percent decline in injury rates and a 26 percent reduction in injury costs, when compared to a matched cohort of 409 California companies that were eligible but not selected for random OSHA inspections.

Further, “we find no evidence that these improvements came at the expense of employment, sales, credit ratings, or firm survival,” the researchers said.

The trio went looking for data in a turbo-charged debate over the effect of regulation on business that is better known for its anecdotal evidence, and found it in the workplace inspections records spanning 1996 to 2006. OSHA had identified industries with high injury rates from Bureau of Labor Department statistics, then assembled a list of companies with 10 or more employees and randomly selected a group for random inspections.

The trio used injury data from worker compensation claims, “employment, company survival, and compensation to look for unintended harms from inspections.” They found that five years after the workplace inspection, companies reduced their medical costs and lost earnings by $355,000 – 14 percent of the average annual payroll of the sample.

“These results do not support the hypothesis that OSHA regulations and inspections on average have little value in improving health and safety,” they concluded. “…economists’ benchmark model suggests that the increased costs of safety measures that reduce injury rates can also reduce wages, employment, and rates of firm survival. Although we cannot rule out any of these unintended consequences, we found no evidence that inspections lead to worse outcomes for employees or employers. The point estimates on changes in employment, payroll, sales, and credit ratings were all positive, although all coefficients were small, and none approached statistical significance.”

While this was one small experiment in regulatory intervention, with one agency and one state, it does give other researchers a road map to replicate the results or apply the methodology to other contexts. In the automotive world, the conventional wisdom is that safety sells – could safety save money, too?