Valuing Mortality Reductions in India: A Study of Compensating-Wage Differentials

Abstract

Conducting cost-benefit analyses of health and safety regulations requires placing a dollar value on reductions in health risks, including the risk of death. Compensating-wage differentials, which are often used to estimate the value of risk reductions, suggest that compensation for the loss of a statistical life in Indian manufacturing would be between 6.4 million and 15 million in 1990 rupees (roughly $150,000 to $360,000).

Conducting cost-benefit analyses of health and safety regulations requires placing a dollar value on reductions in health risks, including the risk of death. In the United States, mortality risks are often valued using compensating-wage differentials. These differentials measure what a worker would have to be paid to accept a small increase in his risk of death-which is assumed to equal what the worker would pay to achieve a small reduction in his risk of death.

Simon, Cropper, Alberini, and Arora estimate compensating-wage differentials for risk of fatal and nonfatal injuries in India's manufacturing industry. They estimate a hedonic wage equation using the most recent Occupational Wage Survey, supplemented by data on occupational injuries from the Indian Labour Yearbook.

Their estimates of compensating-wage differentials imply a value of statistical life (VSL) in India of 6.4 million to 15 million 1990 rupees (roughly $150,000 to $360,000 at current exchange rates). This number is between 20 and 48 times forgone earnings-the human capital measure of the value of reducing the risk of death.

The ratio of the VSL to forgone earnings implied by the study is larger than in comparable U.S. studies but smaller than the ratio implied by the only other compensating-wage study for India (Shanmugam 1997). The latter implies a ratio of VSL to forgone earnings of 73!

The authors caution that in India, as in the United States, compensating-wage differentials in the labor market may overstate what individuals would themselves pay to reduce the risk of death. They suggest using their estimates as an upper bound on willingness to pay to reduce risk of death, and forgone earnings as a lower bound.

This paper - a product of Infrastructure and Environment, Development Research Group - is part of a larger effort in the group to promote the use of benefit-cost analysis in evaluating environmental programs. The study was funded by the Bank's Research Support Budget under research project Valuing Mortality Reductions in India: A Study of Compensating Wage Differentials (RPO 680-84).