RESERVE funds held by WorkCover, the NSW workers compensation scheme, fell dramatically from $520 million in May 1994 to $64 million in June of this year. In an attempt to arrest this decline, the NSW Government is rushing through Parliament a series of measures designed to reduce the costs of the scheme.
Some of these measures are aimed at cutting administration costs. Others are designed to reduce compensation payments. Is this the right way to go?
Recent US research has shown that a genuine workers compensation scheme can play a crucial role in improving workplace safety and in reducing labour costs.
When premiums for workers compensation insurance are related to an employer's workplace accident record, then the employer has a financial incentive to improve workplace safety. How strong are these incentives?
Research by Duke University economists Michael Moore and Kip Viscusi in their book Compensation Mechanisms for Job Risks (Princeton University Press, 1990) shows that workplace accidents in the US would be about 30 per cent higher in the absence of compulsory workers compensation insurance, whereas occupational health and safety regulations (OH&S) appear to have reduced workplace accidents only by 2 to 4 per cent, perhaps less.
In short, workers compensation in the US is about 10 times more effective than OH&S regulations in reducing workplace accidents.
There are good reasons for the effectiveness of workers compensation. Where insurance premiums are related to workplace accident records, all employers have direct financial incentives to discover ways of making workplaces safer. Moreover, an employer is in a much better position than a regulator to know the kinds of safety measures that are likely to be cost-effective in his particular workplace.
And with insurance premiums dependent on accident records, employers have incentives to listen to employees views on how to improve safety. The advantage of the insurance or "carrot approach" is that it is essentially self-enforcing.
In contrast, compliance with OH&S standards is mandatory even when it is not cost-effective. Moreover, enforcing regulations tends to be costly and ineffective.
Here in Australia, there is a danger that measures designed to artificially hold down workers compensation insurance premiums will weaken incentives for employers to improve workplace safety. This is especially problematic where workers compensation premiums for high-risk industries are artifically reduced by cross-subsidies from low-risk industries.
There is also a danger that regulations will reduce incentives to control fraudulent compensation claims, thereby raising costs of workers compensation schemes.
Moreover, there are reasons for believing that holding down insurance premiums does not necessarily reduce overall employment costs. Wages are generally higher for more hazardous occupations.
These wage premiums represent compensation in advance for risking injury or death. Because workers compensation insurance provides compensation after an accident workers demand less in advance. In other words, wages decline because risk premiums are reduced.
Wages also tend to be reduced because improvements in workplace safety reduce the wage premiums demanded by workers. Indeed, Moore and Viscusi show that in the US, the net effect of compulsory workers compensation has been to reduce total employment costs in non-unionised industries.
The conclusion is that measures which artificially reduce premiums may both be detrimental to workplace safety and fail to reduce overall employment costs.
These issues are complicated in Australia by other factors, such as artificially determined award rates of pay which may prevent adjustments in wage premiums for risk in response to improvement in safety.
But, such complications are just one more reason for a comprehensive and systematic overhaul of our industrial relations systems and related regulatory paraphernalia.
ADVERTISEMENT
No comments:
Post a Comment