Citation

Viscusi WK. J. Forensic Econ. 1990; 3(3): 61-70.

Copyright

(Copyright © 1990, National Association of Forensic Economics)

DOI

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PMID

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Abstract

Over two centuries ago in his book, The Wealth of Nations, Adam Smith developed the basic theory of compensating differentials for hazardous jobs. The theory can be put in terms of the basic elements of individual preferences. If a job is made unattractive by a higher risk level or some other negative characteristic, there must be some offsetting advantage of the job, such as a higher wage rate, to compensate the worker for this added risk. The focus of the economics literature has been on estimating these compensating differentials for job risk, where the rate of tradeoff between money and risk gives the value attached to the statistical lives at stake.

The basic elements of this theory are not controversial. Although empirical estimation of the tradeoff between risk and wages is continuing to be refined, there is general acceptance of the existence and importance of such a linkage. Indeed, every major labor economics textbook includes an extensive discussion of this analysis of compensatingd ifferentials for risk within the context of the theory of labor supply. As with empirical estimates of other economic relationships, there will be some error involved in the process. The empirical task is to continually refine our analysis of these relationships so that we can better understand their magnitude.

The focus of this paper will be on exploring the various sources of uncertainty and the problems involved in estimating the premiums for risk that govern values of life. Particular attention will be devoted to the succession of steps that have been taken within the context of the literature to resolve these issues.