Occupational safety in a frictional labor market

Abstract

Work-related injuries and diseases entail substantial economic costs worldwide. This paper studies how the provision of occupational safety is affected by the presence of search frictions on the labor market. Safety measures reduce a firm’s current profit but increase future expected output due to lower worker mortality. I find that search frictions reduce the long-run gains of safety measures, which lowers the socially optimal level of occupational safety relative to a frictionless labor market. In a decentralized setting where wages and safety measures are determined at the firm level, matching externalities and a labor supply externality may further reduce safety provision. I obtain conditions under which these externalities are internalized and discuss the role of policy in promoting occupational safety. The model predicts a positive relationship between the equilibrium unemployment rate and work-related mortality, which is verified using US data on fatal occupational injuries. Based on these estimates, I conclude that mortality from work-related injuries may be 10–15% lower in absence of search frictions.