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Market estimates of worker dislocation costs
Economics Letters North-Holland
24 (1987) 381-384
MARKET ESTIMATES Donald
W. ANDERSON
Research
Triangle Institute,
Received
6 April 1987
381
OF WORKER DISLOCATION and Ram V. CHANDRAN
Research
COSTS
*
Triangle Park, NC 27709, USA
The labor literature has treated job security as an attribute that can be valued in a hedonic wage framework. What the literature has not done is construction of incremental willingness-to-pay measures for job dislocations. We have taken this step, and have compared estimates to accounting estimates.
1. Introduction Public policies such as environmental regulations, trade restrictions, and workplace safety and health standards may directly or indirectly impact the market for labor services. Impacts may cause some workers to lose their jobs. Such losses impose costs on the dislocated workers, and contribute to total social costs of regulation. Several executive orders and federal acts require, explicitly or implicitly, the measurement of worker dislocation costs. Executive Order 12291, which has been interpreted as requiring social cost analysis in an opportunity cost framework, most apparently demands consideration of worker dislocation costs [Fisher (1984)]. Previous estimates of dislocation costs are not based in a consistent welfare theoretic framework. They do not represent individuals’ willingness to pay to avoid job dislocation. Rather, they represent cost estimates that are likely to be significant understatements of willingness-to-pay. The traditional method for estimating these costs is to account for a worker’s lost wages and benefits, search costs, and any other ‘tangible’ costs during some stipulated period of unemployment [see for example Flaim (1984) Jenkins and Montmarquette (1979) Bale (1976) and Mutti (1978)]. Traditional methods may provide a lower-bound on dislocation costs workers experience. Accounting methods are imperfect because they fail to measure other, potentially important costs of dislocation. Gordon (1981) states that the most severe shortcoming of any ‘. . . numerical calculation of the cost of job loss.. is the psychic cost of unemployment.’ Gordon lists six ‘psychic consequence’. They costs’ of involuntary unemployment that he feels ‘. . . together have a substantial include wasted time, nervousness and insecurity about lack of insurance, children’s strain and tension, and anguish about one’s ‘worth’. A more complete estimate would be the maximum amount a worker would require to be indifferent between his current job and an unemployment experience. Just, Hueth and Schmitz (1982) argue for the use of willingness-to-pay approaches for measuring costs of public policies, * The authors comments.
would like to thank
0165-1765/87/$3.50
Tayler
H. Bingham,
C>1987, Elsevier Science Publishers
John W. Ruser,
Michael
B.V. (North-Holland)
T. French
and V. Kerry
Smith for helpful
382
D. W. Anderson, R. V. Chandran
/ Market estimates
of worker dislocation costs
including costs to labor suppliers. Like other values, willingness-to-pay to avoid dislocation is revealed in the market behavior of labor suppliers. This paper introduces this simple extension to traditional labor market analysis to show how the cost of displacement can be readily calculated from market data.
2. Model The concept of compensating wage differentials recognizes that jobs differ not only in the compensation provided but also in a number of non-pecuniary factors. Among others, these factors include safety risks, health risks, hours flexibility, prestige, and job security. The hedonic wage equation has been employed to impute a trade-off between wages and job security. Several researchers have recognized the importance of job security. Topel (1984) found that in the absence of unemployment insurance, each point of anticipated unemployment raises an individual’s wage by about 2.5 percent. Adams (1985) computes a wage elasticity with respect to unemployment probability of 0.20 at the mean unemployment rate of 6 percent. Computed at the mean, a one-point increase in unemployment probability (from 6 percent to 7 percent) represents a 16.67 percent increase from the mean. Consequently, the compensating wage differential per point of unemployment is 3.33 percent (0.20 X 16.67). Though it has not previously been done, it is a short step to compute the implied cost of a dislocation: annual compensating differential annual probability of unemployment
3. Empirical
= cost of dislocation.
results
Table 1 shows the results of using Topel’s and Adam’s results in conjunction with April 1986 wage data for several manufacturing sectors. The estimates were computed as follows. The average annual wage of a worker in the asbestos products industry (for example) is $22,880. Using Topel’s estimate, such a worker would be paid $572 annually for accepting a one-point risk of unemployment. The implicit cost of a layoff is $57,200 ($572/0.01). The results reported in table 1 are not intended for comparison with one another. We are aware that the reported estimates for different industries differ because annual wages differ. We are not suggesting that the wages differ primarily (or even significantly) due to differences in job security.
Table 1 Cost of worker
dislocations
Industry
Asbestos products Farm machinery Textile machinery Watches and clocks
- preliminary Annual
results. a wage
$22,880 $23,816 $17,836 $14,300
a Wage data from July 1976 Employment
and Earnings,
Worker
dislocation
costs
Topel (CD = 2.5%)
Adams
$57,200 $59,540 $44,590 $35,750
$75,504 $78,593 $58,859 $47,190
US Department
of Labor,
Bureau
(CD = 3.3%)
of Labor
Statistics.
D. W. Anderson, Table 2 Alternative
worker
dislocation
R. V. Chandran
estimates
of worker dislocation costs
383
cost estimates. Dislocation
Author Anderson-Chandran Anderson-Chandran Flaim (1984) EPA (1984)
/ Market
(using Topel results) (using Adams results)
cost estimate
$57,200 $75,504 $5,270 $4,095
Two accounting estimates of worker dislocation costs are available for asbestos products workers. They are compared to our estimates in table 2. Flaim (1984) examined 1982 earnings in the stone, clay and glass products industry (of which asbestos products is a subset). He compared earnings of workers who experienced some unemployment that year with others who did not. The Environmental Protection Agency [EPA (1984)] estimated the during-search foregone income costs of worker dislocations in a subset of the asbestos products industry. The EPA estimate is region-specific, reflects actual wage rates, and accounts for actual statistical durations of unemployment. When compared to the accounting method estimates, ours are, as expected, higher. In fact, our estimates are ten to twenty times higher. It is interesting to note that the stress of losing one’s job has been closely compared to the stress of suffering a major personal injury or illness [Holmes (1967)]. Compare then our range-midpoint estimate of worker dislocation costs (about $57,000) with an estimate in 1985 dollars of the implicit value of non-fatal injuries and illnesses - $40,000 [Viscusi (19X3)]. Further evidence that the cost of job loss is substantial is provided by Schapiro and Ahlburg (1982-1983). They estimate that a one percentage point increase in the unemployment rate is associated with about 318 more suicides annually.
4. Conclusions The labor literature has treated job security as an attribute whose value is revealed using the hedonic wage method. What has not been done is to estimate incremental willingness-to-pay measures for job dislocations. We have taken this step, and have compared estimates to accounting estimates. As expected, our market estimates are higher than the accounting estimates. Improvements in model specification and data in work like that done by Topel (1984) and Adams (1985) could yield still more satisfactory results. Our suggestions have practical applications. Policy-induced worker dislocations are commonplace, and their costs can be measured in a welfare-theoretic framework.
References Adams, James, D., 1985, Permanent differences in unemployment and permanent wage differentials, Quarterly Journal of Econometrics 100, no. 1, 29-56. Bale. Malcolm D., 1976, Estimates of trade displacement costs for US workers, Journal of International Economics 6, 245-250. Environmental Protection Agency, 1984, Regulatory impact analysis of controls on asbestos and asbestos products (Office of TOXIC Substances, Washington, DC). Fisher, Ann, 1984, An overview and evaluation of EPA’s guidelines for conducting regulatory impact analyses, in: V. Kerry Smith, ed., Environmental policy under Reagan’s executive order (University of North Carolina Press, Chapel Hill, NC) 99-118.
384
D. W Anderson,
R. V. Chandran
/ Market
estimates of worker dislocation costs
Flaim, Paul O., 1984, Unemployment in 1982: The cost to workers and their families, Monthly Labor Review, Feb., 30-37. Gordon, Robert J., 1981, Macroeconomics (Little, Brown and Company, Boston, MA). Holmes, T.H., MD, 1967, The social readjustment rating scale, Journal of Psychosomatic Research II. Jenkins, Glenn P. and Claude Montmarquette, 1979, Estimating the private and social opportunity cost of displaced workers, Review of Economics and Statistics LXI, no. 3, Aug., 342-353. Just, Richard E., Darrell L. Hueth and Andrew Schmitz, 1982, Applied welfare economics and public policy (Prentice-Hall, Englewood Cliffs, NJ). Mutti, John, 1978, Aspects of unilateral trade policy and factor adjustment costs, Review of Economics and Statistics LX, no. 1, Feb., 102-110. Schapiro, Morton Owen and Dennis A. Ahlburg, 1982-1983, Suicide: The ultimate cost of unemployment, Journal of Post Keynesian Economics 5, no. 2, Winter, 276-280. Topel, Robert H., 1984, Equilibrium earnings, turnover, and unemployment: New evidence, Journal of Labor Economics 2, no. 4, 500-522. Viscusi, W. Kip, 1983, Risk by choice (Harvard University Press, Cambridge, MA).
24 (1987) 381-384
MARKET ESTIMATES Donald
W. ANDERSON
Research
Triangle Institute,
Received
6 April 1987
381
OF WORKER DISLOCATION and Ram V. CHANDRAN
Research
COSTS
*
Triangle Park, NC 27709, USA
The labor literature has treated job security as an attribute that can be valued in a hedonic wage framework. What the literature has not done is construction of incremental willingness-to-pay measures for job dislocations. We have taken this step, and have compared estimates to accounting estimates.
1. Introduction Public policies such as environmental regulations, trade restrictions, and workplace safety and health standards may directly or indirectly impact the market for labor services. Impacts may cause some workers to lose their jobs. Such losses impose costs on the dislocated workers, and contribute to total social costs of regulation. Several executive orders and federal acts require, explicitly or implicitly, the measurement of worker dislocation costs. Executive Order 12291, which has been interpreted as requiring social cost analysis in an opportunity cost framework, most apparently demands consideration of worker dislocation costs [Fisher (1984)]. Previous estimates of dislocation costs are not based in a consistent welfare theoretic framework. They do not represent individuals’ willingness to pay to avoid job dislocation. Rather, they represent cost estimates that are likely to be significant understatements of willingness-to-pay. The traditional method for estimating these costs is to account for a worker’s lost wages and benefits, search costs, and any other ‘tangible’ costs during some stipulated period of unemployment [see for example Flaim (1984) Jenkins and Montmarquette (1979) Bale (1976) and Mutti (1978)]. Traditional methods may provide a lower-bound on dislocation costs workers experience. Accounting methods are imperfect because they fail to measure other, potentially important costs of dislocation. Gordon (1981) states that the most severe shortcoming of any ‘. . . numerical calculation of the cost of job loss.. is the psychic cost of unemployment.’ Gordon lists six ‘psychic consequence’. They costs’ of involuntary unemployment that he feels ‘. . . together have a substantial include wasted time, nervousness and insecurity about lack of insurance, children’s strain and tension, and anguish about one’s ‘worth’. A more complete estimate would be the maximum amount a worker would require to be indifferent between his current job and an unemployment experience. Just, Hueth and Schmitz (1982) argue for the use of willingness-to-pay approaches for measuring costs of public policies, * The authors comments.
would like to thank
0165-1765/87/$3.50
Tayler
H. Bingham,
C>1987, Elsevier Science Publishers
John W. Ruser,
Michael
B.V. (North-Holland)
T. French
and V. Kerry
Smith for helpful
382
D. W. Anderson, R. V. Chandran
/ Market estimates
of worker dislocation costs
including costs to labor suppliers. Like other values, willingness-to-pay to avoid dislocation is revealed in the market behavior of labor suppliers. This paper introduces this simple extension to traditional labor market analysis to show how the cost of displacement can be readily calculated from market data.
2. Model The concept of compensating wage differentials recognizes that jobs differ not only in the compensation provided but also in a number of non-pecuniary factors. Among others, these factors include safety risks, health risks, hours flexibility, prestige, and job security. The hedonic wage equation has been employed to impute a trade-off between wages and job security. Several researchers have recognized the importance of job security. Topel (1984) found that in the absence of unemployment insurance, each point of anticipated unemployment raises an individual’s wage by about 2.5 percent. Adams (1985) computes a wage elasticity with respect to unemployment probability of 0.20 at the mean unemployment rate of 6 percent. Computed at the mean, a one-point increase in unemployment probability (from 6 percent to 7 percent) represents a 16.67 percent increase from the mean. Consequently, the compensating wage differential per point of unemployment is 3.33 percent (0.20 X 16.67). Though it has not previously been done, it is a short step to compute the implied cost of a dislocation: annual compensating differential annual probability of unemployment
3. Empirical
= cost of dislocation.
results
Table 1 shows the results of using Topel’s and Adam’s results in conjunction with April 1986 wage data for several manufacturing sectors. The estimates were computed as follows. The average annual wage of a worker in the asbestos products industry (for example) is $22,880. Using Topel’s estimate, such a worker would be paid $572 annually for accepting a one-point risk of unemployment. The implicit cost of a layoff is $57,200 ($572/0.01). The results reported in table 1 are not intended for comparison with one another. We are aware that the reported estimates for different industries differ because annual wages differ. We are not suggesting that the wages differ primarily (or even significantly) due to differences in job security.
Table 1 Cost of worker
dislocations
Industry
Asbestos products Farm machinery Textile machinery Watches and clocks
- preliminary Annual
results. a wage
$22,880 $23,816 $17,836 $14,300
a Wage data from July 1976 Employment
and Earnings,
Worker
dislocation
costs
Topel (CD = 2.5%)
Adams
$57,200 $59,540 $44,590 $35,750
$75,504 $78,593 $58,859 $47,190
US Department
of Labor,
Bureau
(CD = 3.3%)
of Labor
Statistics.
D. W. Anderson, Table 2 Alternative
worker
dislocation
R. V. Chandran
estimates
of worker dislocation costs
383
cost estimates. Dislocation
Author Anderson-Chandran Anderson-Chandran Flaim (1984) EPA (1984)
/ Market
(using Topel results) (using Adams results)
cost estimate
$57,200 $75,504 $5,270 $4,095
Two accounting estimates of worker dislocation costs are available for asbestos products workers. They are compared to our estimates in table 2. Flaim (1984) examined 1982 earnings in the stone, clay and glass products industry (of which asbestos products is a subset). He compared earnings of workers who experienced some unemployment that year with others who did not. The Environmental Protection Agency [EPA (1984)] estimated the during-search foregone income costs of worker dislocations in a subset of the asbestos products industry. The EPA estimate is region-specific, reflects actual wage rates, and accounts for actual statistical durations of unemployment. When compared to the accounting method estimates, ours are, as expected, higher. In fact, our estimates are ten to twenty times higher. It is interesting to note that the stress of losing one’s job has been closely compared to the stress of suffering a major personal injury or illness [Holmes (1967)]. Compare then our range-midpoint estimate of worker dislocation costs (about $57,000) with an estimate in 1985 dollars of the implicit value of non-fatal injuries and illnesses - $40,000 [Viscusi (19X3)]. Further evidence that the cost of job loss is substantial is provided by Schapiro and Ahlburg (1982-1983). They estimate that a one percentage point increase in the unemployment rate is associated with about 318 more suicides annually.
4. Conclusions The labor literature has treated job security as an attribute whose value is revealed using the hedonic wage method. What has not been done is to estimate incremental willingness-to-pay measures for job dislocations. We have taken this step, and have compared estimates to accounting estimates. As expected, our market estimates are higher than the accounting estimates. Improvements in model specification and data in work like that done by Topel (1984) and Adams (1985) could yield still more satisfactory results. Our suggestions have practical applications. Policy-induced worker dislocations are commonplace, and their costs can be measured in a welfare-theoretic framework.
References Adams, James, D., 1985, Permanent differences in unemployment and permanent wage differentials, Quarterly Journal of Econometrics 100, no. 1, 29-56. Bale. Malcolm D., 1976, Estimates of trade displacement costs for US workers, Journal of International Economics 6, 245-250. Environmental Protection Agency, 1984, Regulatory impact analysis of controls on asbestos and asbestos products (Office of TOXIC Substances, Washington, DC). Fisher, Ann, 1984, An overview and evaluation of EPA’s guidelines for conducting regulatory impact analyses, in: V. Kerry Smith, ed., Environmental policy under Reagan’s executive order (University of North Carolina Press, Chapel Hill, NC) 99-118.
384
D. W Anderson,
R. V. Chandran
/ Market
estimates of worker dislocation costs
Flaim, Paul O., 1984, Unemployment in 1982: The cost to workers and their families, Monthly Labor Review, Feb., 30-37. Gordon, Robert J., 1981, Macroeconomics (Little, Brown and Company, Boston, MA). Holmes, T.H., MD, 1967, The social readjustment rating scale, Journal of Psychosomatic Research II. Jenkins, Glenn P. and Claude Montmarquette, 1979, Estimating the private and social opportunity cost of displaced workers, Review of Economics and Statistics LXI, no. 3, Aug., 342-353. Just, Richard E., Darrell L. Hueth and Andrew Schmitz, 1982, Applied welfare economics and public policy (Prentice-Hall, Englewood Cliffs, NJ). Mutti, John, 1978, Aspects of unilateral trade policy and factor adjustment costs, Review of Economics and Statistics LX, no. 1, Feb., 102-110. Schapiro, Morton Owen and Dennis A. Ahlburg, 1982-1983, Suicide: The ultimate cost of unemployment, Journal of Post Keynesian Economics 5, no. 2, Winter, 276-280. Topel, Robert H., 1984, Equilibrium earnings, turnover, and unemployment: New evidence, Journal of Labor Economics 2, no. 4, 500-522. Viscusi, W. Kip, 1983, Risk by choice (Harvard University Press, Cambridge, MA).