Workers' compensation and employees' safety incentives in Sweden

Abstract

There is in many countries today some form of compulsory work injury insurance. The exact nature of this insurance coverage is therefore a matter for public policy. Workers’ compensation influences the incentives for both firms and employees, as well as resource allocation between firms and industries.’ This paper deals with one specific feature of such compensation: the relationship between the amount of coverage for pecuniary losses and the preventive activities of the employees. In theoretical analyses of safety at work, it is commonly assumed that both the employer and the employee influence the probability of accidents. It is also commonly assumed that both parties change their behavior in response to infinitesimal changes in benefit-cost structures.’ This implies that employees will lower their safety precautions in response to improvements in the benefit levels of compensation programs (moral hazard). Such measures would lower the return to the preventive activities undertaken by employees. There is thus a conflict between high coverage and incentives for injury prevention.3 In practice, however, relevant policy changes in pecuniary benefits may have no effect on the behavior of the employees, or it may be impossible to discern such effects in quantitative terms. It is not certain that an employee is able to increase his utility by marginal adjustments in preventive activity. An individual’s behavior with respect to occupational hazards may be totally uninfluenced by pecuniary loss. Finally, he may be unaware of certain risks. The relationship between benefit levels and risk behavior is usually studied in aggregate terms. The fewer workers who change their behavior in response to a pecuniary incentive, the less likely it is that the relationship can be established empirically. It is also less of a problem for policymakers. This paper adds to the small body of empirical literature concerned with this problem.4 The evidence to date has not yielded definite conclusions, and it remains an open question as to what extent employees’ precautions respond to financial loss. The major finding has been that there exists a positive relationship between benefit levels and the number of reported injuries. However, previous studies have been unable to distinguish between two possible effects: (1) higher benefit levels induce workers to take more risks-hence the number of accidents in-