Firms Sacrifice Worker Safety When Demand Is High
When demand for a product is high, companies can maximize prices and profits. Do they then use their increased financial resources to bolster worker safety? Using data from the U.S. mining industry, Yale SOM’s Kerwin Charles and his co-authors investigated the relationship between higher demand and safety, and found that increased investment in safety measures is overwhelmed by the incentive to increase production while prices are high, leaving workers less safe overall.
By Ben Mattison
Mining is difficult and dangerous work. In 2016, 10 U.S. mine workers per 10,000 were killed on the job—nearly three times the average rate for private industry. When times are good for mines—that is, when demand is high for the commodities that they produce—workers benefit by getting more hours of work and more pay. Does the greater prosperity that comes with high demand also trickle down to miners in the form of greater safety?
The relationship between demand and safety hasn’t gotten much academic attention, says Kerwin K. Charles, Yale SOM’s Indra K. Nooyi Dean and the Frederic D. Wolfe Professor of Economics, Policy, and Management. Economists tend to focus on wages as an easily measurable metric for the value that the market places on workers. “Wages capture how the worker is faring and the price the firm pays the employee to work,” he says. “On the other hand, wages are merely one measure of the worker’s wellbeing. Health at the job is an important dimension of worker wellbeing that’s relatively understudied.”
Case studies of individual firms have suggested that greater financial resources—when a company is bought by a large conglomerate, for example—can improve safety; simply having more liquidity allows them to invest in costly equipment or training. That might also be true when high demand leads to bigger profits. But Charles wondered if those studies reflected the whole picture. While higher demand could fund investments in safety measures—new equipment, for example—he hypothesized that it would also incentivize firms to focus on production over safety.
When demand is high, he says, “I’ve got money in my pocket. I can buy a fan. I can buy a safer drill press. But here’s a second thing that’s going to happen: I’ll think, I’d better make hay while the sun is shining. When times are good I should produce more. That means work my workers harder. That means work on the weekends. That safety training? Let’s put it off.”
In economic terms, the opportunity cost of focusing on safety—that is, the potential profits lost—goes up when demand is higher. And that creates a second force counteracting the greater ability to invest in safety.
In a new working paper, Charles and his co-authors (Matthew S. Johnson of Duke University, Melvin Stephens Jr. of the University of Michigan, and Do Q. Lee, a student at New York University) use data from the U.S. mining industry to investigate the effect of demand on safety—and to tease out the effects of these two opposing economic forces. They find that while greater financial resources can improve safety, the impact of opportunity costs is higher, meaning that overall, worker safety suffers when demand is high.
Read the study: “Demand Conditions and Worker Safety: Evidence from Price Shocks in Mining”
The mineral mining industry in the United States provided an ideal setting to test these ideas. “There are very few industries more carefully monitored with respect to accidents than mining,” Charles says. Mines must report every serious accident, and they are frequently, but unpredictably, inspected—meaning that “with a lot of elbow grease and shoe leather, I can put together the complete safety record for every mine in American between 1983 or so and 2015 or so.”
Just as importantly, mining offered a direct measure of demand: the global price, captured quarterly, for each mineral being mined.
When the researchers compared the two sets of data, they found that a 1% increase in price led to an increase of .15% in serious injuries and mortality—evidence for the opportunity cost hypothesis. Records from the mine inspections provided even starker evidence that high demand leads mines to prioritize production over safety. A 1% increase in price led to a .13% increase in violations of health and safety regulations; in many of them, the inspector judged that the violation resulted from a negligent or willful act by the employer.
The next question that Charles and his team tackled was how to square these results with the earlier studies that seemed to show that greater financial resources allow for more investment in safety—what Charles calls the financial credit constraint channel. “One interpretation is that the financial credit constraint channel is nonexistent, and these earlier case studies are completely wrong,” he says. “The other possibility is that they’re not wrong, that it’s present and maybe substantial—but overridden by an even larger opportunity cost channel.”
To determine which interpretation was correct, Charles needed a way to isolate the two effects, to find a factor that gives mines greater financial resources without greater demand—“something that eases their budget constraints, makes them richer, eases liquidity, but doesn’t necessarily affect the value of what they’re making.”
To find that something, Charles looked at mines that are owned by large conglomerates that produce multiple minerals. One mine under the company’s umbrella might be producing gold, while others are focused on silver or aluminum. Research has previously shown that increased cash flow for one corporate sibling benefits the others.
“So I’m going to ask, in effect, what happens when my sister aluminum mine has a great quarter, thereby passing on some of its good fortune to me?” Charles says. The answer is that at a mine that doesn’t itself have high demand but is benefiting from high demand at a sister mine, injuries on the job go down. So greater financial resources, in isolation, do bolster safety, Charles concludes. But when those resources stem from higher demand, the impulse to maximize profit at the expense of safety—the opportunity cost channel—is a larger factor.
Can the results of this study of the mining industry be generalized to other industries? Charles’ guess is that they can—and that the pressure of opportunity costs might be even more dominant outside of mining. “The liquidity constraint effect only applies if the effort to increase safety is costly”—and mining is an industry in which safety is a substantial cost. “The thing that’s ever present is the opportunity cost channel. It always behooves a firm to make more stuff when times are good.”
Charles points to the example of a pizza maker on Super Bowl Sunday, when demand is the highest of the year. “If I run Joe’s Pizza Shop, here’s what I’m saying: ‘Get the pizza out!’ I’m not, at that time, reminding people to wear gloves, to open the oven and step away. No, because it’s Super Bowl Sunday. We can make $1,000 today! I think it’s true across contexts.”
There’s also a more abstract takeaway from this research, Charles says. When economists examine the forces acting on a firm or an individual, they have to consider the possibility that multiple forces may be interacting in complex ways.
“The elucidation of the different forces requires careful thinking,” he says. “Sometimes when we see a zero effect it could either be because neither of the two forces we have in mind exist, or it could mean that they both exist and they’re huge—and cancel.”
The challenge involved in such questions is one of the pleasures of his work, he adds. “Just thinking about how one would disentangle in equilibrium the forces acting upon workers and firms is the reason I became an economist and it’s the most interesting thing we do.”