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Literature review
Several writers have long argued that the full costs of work accidents greatly exceed the obvious, insurance costs (see e.g. Heinrich, 1959). They have also claimed that studies which identify and publicise the additional costs would raise the awareness of employers, in particular, and motivate more aggressive efforts at accident prevention (Klen, 1989; Laufer, 1987; Leathers and Williams, 1984; Leopold and Leonard, 1987). This belief has prompted many researchers to study the costs of work accidents and to compare the magnitude of non-insurance and insurance costs. Most researchers have focused on the work accident costs of particular industries, and have solicited work accident victims and their supervisors for information on costs. Other researchers have focused on the work accident costs of whole economies, and have relied on large-scale surveys and a host of assumptions to make cost estimates. Studies of industries have generally found that the non-insurance costs of work accidents are no more than a third of insurance costs (Laufer, 1987; Leathers and Williams, 1984; Leopold and Leonard, 1987), whereas studies of economies have generally estimated non-insurance costs that are several multiples of insurance costs (Industry Commission, 1995; Mangan, 1993; Miller and Galbraith, 1995). However, many of these studies are not strictly comparable, because of differences in cost definitions and in the types of costs examined. Heinrich (1959) was the first to measure work accident costs in his studies of individual accidents during the 1920s. He used his work to argue that most work accident costs are hidden, in the sense of being difficult for employers to identify and quantify. Visible costs were termed direct costs, and were said to include insurance compensation and medical expenses. Hidden costs were termed indirect costs, and were said to include, among other items, the lost labour time of the accident victim, co-workers, and management, and the costs of repairing and replacing damaged capital and material. Heinrich also hypothesised that indirect and direct costs are linearly related, so that indirect costs are typically four times greater than direct costs (1959: 50). Simonds and Grimaldi (1956) supported Heinrich=s claim that indirect costs are large in relation to direct costs, but disputed the notion that there is any linear relationship between the two. They also criticised Heinrich=s definition of indirect costs, arguing that many such costs are direct, in the sense of appearing as distinct monetary outlays in a firm=s financial accounts. For this reason, Simonds and Grimaldi recommended a change in terminology from direct and indirect to insured and uninsured costs. This has not persuaded all later writers to change their jargon, but has prompted some of them to re-define direct and indirect costs as insured and uninsured. Recent researchers have collected and analysed empirical evidence of indirect and direct costs to determine whether the magnitude of the former might alone motivate further employer efforts at hazard prevention. For example, Levitt et al. (1981) examined the indirect and direct costs of 49 construction accidents in the United States. In a re-examination of their data, Laufer calculated an uninsured to insured cost ratio of only 1:3 (Laufer, 1987: 305). In New Zealand, Leathers and Williams (1984) surveyed 222 farmers on the indirect costs of their work accidents by asking questions about production losses and the repair and replacement of capital goods and material. They too calculated a low indirect to direct cost ratio of 1:2 (1984: 71). They also found that a few accidents accounted for the bulk of indirect costs, suggesting that indirect costs are usually incidental and thus warrant little attention from farmers. Leopold and Leonard (1987) surveyed workers and their supervisors for cost information regarding 394 construction accident cases in Britain. They defined directs costs broadly to encompass the repair and replacement of equipment and payment of wages for days absent. As a result, their indirect to direct cost ratio was necessarily uncomparable to those of other studies. However, they also separated uninsured and insured costs to arrive at a ratio of 1:4.5 for firms that had had an accident in the previous year (1987: 286). For the 40 per cent of firms that had not had an accident, there were no uninsured costs at all; the insurance costs were the total costs (1987: 292). 466
Linda Head and Mark Harcourt Laufer (1987) interviewed 50 site managers in 19 Israeli construction firms about the indirect or uninsured costs of the last five work accidents on each site. These costs included lost labour time, payment of wages to the absent victim, and the costs of property repair and replacement. The indirect costs were estimated to be 0.76 per cent of payroll costs, as against direct, insurance costs of 2.7 per cent, for a ratio of 1:3.6 (Laufer, 1987: 302-303). In Finland, Klen (1989) surveyed injured loggers and their supervisors about the indirect and direct costs of 364 temporarily disabling accidents at two forestry companies. Costs were categorised as either employer, employee, or State costs. The State=s costs pertained to hospital care, the employee=s to future earnings lost. Employer costs were subdivided into insured direct costs, uninsured direct costs, and indirect costs. Cost were borne approximately 60 per cent by the employer, 30 per cent by the State, and 10 per cent by the employee (1989: 34). The ratio of the employer=s uninsured to insured costs was 1.4:1 (1989: 38). The ratio of all uninsured costs to the employer=s insured costs was 2.9:1 (1989: 38). National and State studies have generally found much larger indirect to direct cost ratios than industry studies. For instance, Mangan (1993) estimated a ratio of 6:1 for the indirect to direct costs of work injury and disease in Queensland, Australia. He calculated production losses and other related costs, using a formula developed by Andreoni (1986), and the net present value of future earnings losses, using a formula developed by Miller et al. (1987). However, his analysis excluded social security costs, because these transfer payments are not true economic losses, in the sense that they entail a decline in Gross National Product. Miller and Galbraith (1995) estimated the economic losses of American work accidents for 1990. They calculated costs of US$140,000,000,000 for medical services, lost labour time, administration and law, lost production, and lost quality of life, on the basis of many assumptions and data provided by various agencies. This figure suggests an indirect to direct cost ratio of 2.3:1, given workers= compensation costs of US$60,000,000,000 in 1990 (Shalowitz, 1990: 1, 69). The Industry Commission (1995) estimated indirect costs for Australia from an Australian Bureau of Statistics= survey of work accidents in New South Wales. Estimates of employer costs encompassed productivity losses, overtime, and accident investigation. Estimates of employee costs pertained primarily to out-of-pocket medical costs and future earnings losses. Estimates of community costs were provided for, among other things, public sector medical costs, accident investigation, and social security payments. Indirect costs totalled A$15,000,000,000, three times higher than direct, workers= compensation costs of just under A$5,000,000,000 (1995: 94). These costs were shouldered 15 per cent by employers, 40 per cent by employees, and 45 per cent by the community (1995: 101).
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Methods
This study calculates the direct and indirect costs of workplace accidents in New Zealand for 1995. The taxonomy of indirect costs is loosely based on that of the Industry Commission in Australia (1995: 113-122). These costs are further subdivided into community, employer, and employee costs. Cost estimates are derived primarily from data supplied by the Accident Rehabilitation, Compensation, and Insurance Corporation (ACC) and by the Department of Social Welfare. Several categories of indirect cost were not estimated in this study, due to a lack of reliable data. These include the costs of lost leisure, lost self-esteem, reduced social interaction, care by family members, lost educational investment, travel concessions for disabled workers, increased use of community services, and the replacement and repair of capital and material damaged in a workplace accident. However, this study does include costs that were omitted from the Industry Commission=s study, such as recruitment, selection and training costs and legal penalties.
Direct costs
The direct costs of work accidents are those paid by the Accident Rehabilitation, Compensation, and Insurance Corporation=s (ACC) Employers= Account, and financed by employer payroll premiums (ACC, 1995a). The ACC costs include the costs of a contribution to medical care, weekly compensation payments to work accident victims, entitlements to, for example, home help, child care, attendant care, and travel assistance, and injury prevention education and research undertaken by the Occupational Safety and Health Service (OSH) at the Department of Labour. Rehabilitation benefits The ACC partly or completely funds a variety of rehabilitation benefits, which in the Industry Commission=s study were not usually financed by Workers= Compensation Boards in the Australian states. As a result, several costs that are indirect in other countries are partly or completely direct in New Zealand, in the sense that they are paid for by accident insurance scheme. For instance, the ACC pays for at least part of the health care and all of the travel costs incurred by the client obtaining treatment. It also pays for any home help or child care needed by the client because of his or her accident. In 1995, the ACC funded a total of $133,490,000 rehabilitation benefits (see Table 1).
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Linda Head and Mark Harcourt Table 1: The direct costs of workplace accidents in New Zealand, 1995 C The employers= account Injury Prevention Rehabilitation Benefits Vocational rehabilitation Social rehabilitation Medical treatment Hospital treatment Public health care Dental treatment Travel Miscellaneous benefits Compensation Benefits Weekly compensation Independence allowance Lump sums Death benefits Other Payments Research grants Collection fees paid to Inland Revenue Interest on borrowing Share of Operating Costs Total Direct Cost
(Source: ACC, 1995: 63)
$000s 1,968 4,152 22,141 51,281 9,081 36,693 2,011 4,948 3,183 133,490 571,054 3,818 78,989 27,743 681,604 1,141 15,196 3,962 20,299 75,335 912,696
Compensation benefits The ACC provides several compensation benefits, chief of which, at a cost of $571,054,000 in 1995, is weekly compensation (see Table 1). Weekly compensation replaces 80 per cent of the victim=s pre-accident earnings, up to a maximum of $78,000 per annum. However, no weekly compensation is paid for the first or >stand-down= week of absence from work, immediately following a work accident. In 1995, the ACC also paid its clients $27,743,000 in death benefits and $3,818,000 in independence allowances (see Table 1). Death benefits are provided to surviving spouses of work accident fatalities for five years at a rate of 80 per cent of pre-accident earnings. Independence allowances are a weekly benefit, intended to compensate for pain and suffering, and were introduced by the Accident Rehabilitation, Compensation, and Insurance Act 1992 to replace lump sum payments. The cost of pain and suffering is thus treated as a direct cost in this study. It is assumed that the ACC independence allowance of up to $40 per week affords an adequate level of compensation.
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Social welfare benefits In 1995, Sickness Benefits of $352,167,000 were distributed to 42,354 people temporarily incapacitated for work through sickness or accident (Department of Social Welfare, 1995: 5, 28, respectively). Invalids= Benefits of $463,598,000 were distributed to a further 6,132 people permanently and severely incapacitated for work as a result of an accident, sickness, or congenital defect (Department of Social Welfare, 1995: 5, 30). The Department of Social Welfare has no record of the causes for the incapacity of its recipients, and so no way of knowing whether a workplace accident was involved. However, figures from the Population Injury Survey indicate that sickness affects three times as many people as injury in New Zealand (ACC, 1987: 44). In addition, ACC figures for medical treatment claims suggest that 20 per cent of accident victims are injured at work (ACC, 1995b: 4). Together, these figures suggest that five per cent of the recipients of Sickness and Invalids= Benefit are work accident victims. If benefit duration for work accident victims is assumed to be identical to that of other recipients, their Sickness and Invalids= Benefits for 1995 can be respectively estimated as $17,083,500 and $23,179,000, for a total of $40,262,500 (see Table 2).
The indirect employer costs are the uninsured costs borne by employers. They encompass the costs of lost labour time, accident investigation, legal penalties, and replacement of accident victims. Lost labour time The employer loses labour time when the work accident victim is not contributing to production, but is being paid normal wages. It is assumed that lost labour time costs are equal to the wages paid for time not worked, and that all work accident victims can secure payment of regular wages for special leave of up to five days. There are three kinds of lost labour time for which costs are estimated in this study. The first lost labour time cost involves payment of the minimum five days special leave under section 30A of the Holidays Amendment Act 1991 to ACC claimants for the one week stand-down period prior to the commencement of weekly compensation. In 1995, there were 28,022 new claims for weekly compensation from the Employers= Account (ACC, 1995b: 60). If one assumes that these claimants had previously earned the average wage of $610.00 per week (Statistics NZ, 1996: 161), the lost labour time cost for the one week stand-down can be estimated as $17,093,420 for 1995. The second lost labour time cost involves payment of special leave to work accident victims who take a day or more off work, but less than the week required to qualify for weekly compensation. There are no figures on the number of these people, but one New Zealand study indicates that their number is approximately 85 per cent of the number of weekly compensation claimants (Walls, 1988: 373). However, in this study, it is assumed that the 17,629 new claimants for entitlements to home help, childcare, attendant care, travel assistance and the like, but not to weekly compensation (ACC, 1995: 1, 27, 60), comprised all the work accident victims off work for more than a day and less than a week in 1995. It is assumed that these claimants earned the average wage of $610 per week (Statistics NZ, 1996: 161) and, based on findings by Wall (1988: 373), averaged 2.5 days off work. This suggests lost labour time costs associated with one to five days off work of $5,376,845. The third lost labour time cost involves payment of special leave to work accident victims who take less than a day off work for medical treatment. In 1995, 246,677 work accident victims made claims for medical treatment from, for example, a general practitioner or physiotherapist, but made no other claims. It is assumed, based on international evidence (Andreoni, 1986: 119), that each of these people took three-tenths of a day off work for medical treatment. Given an average wage of $610 per week (Statistics NZ, 1996: 161), the implied lost labour time costs are $9,028,378. Total lost labour time costs are estimated as $31,498,643 (see Table 2). Accident investigation by the employer There are no reliable data to estimate employer accident investigation costs. However, it is assumed that most, if not virtually all, employer investigation costs follow from participation in official government inspections after a serious injury or death. It is therefore assumed, just as in the Industry Commission=s study, that these costs are identical to OSH=s 1995 accident investigation costs of $6,342,235 (see Table 2). Legal penalties associated with work accidents Legal penalties are fines imposed on the employer by OSH or the court system, following a successful prosecution for causing a workplace accident. In 1995, OSH pressed charges against 254 organisations, and in every case the employer was convicted and fined. In 120 of the cases, the defendants were ordered to pay restitution to the aggrieved worker. Fines ranged from $95 to $20,000, and totalled $1,022,445 (Pitt, 1996; see Table 2). Recruitment, selection, and training of replacement workers The recruitment, selection, and training of new workers to temporarily or permanently replace work accident victims entails personnel, advertising, and other costs. Estimates of such costs are few and vary widely from US$866 to replace a sales clerk (Stores, 1996: 48), US$1,150 to replace a non-management credit union employee (Vogt, 1995: 48), and $US2,041 to replace a nurse (Pizer, 1994: 36) to US$6,600 to replace a credit union manager (Vogt, 1995: 48) and up to US$12,000 to replace most professionals (Boyd, 1994: 64). Consistent with the empirical evidence (Robinson, 1988, 1991), it is assumed that work accident victims are relatively unskilled, so that each can be cheaply replaced for $1,500. It is further assumed that all 28,022 new weekly compensation claimants in 1995 (ACC, 1995b: 60) had to be replaced, suggesting a total cost of $42,033,000 (see Table 2)
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Linda Head and Mark Harcourt earnings to arrive at an adjusted net present value total of $13,808,060 (see Table 2).
Discussion
The indirect costs of workplace accidents in New Zealand are estimated at $313,085,000 for 1995 (see Table 2). Given that direct costs are $912,696,000 (see Table 1), the overall ratio of indirect to direct costs is estimated as 1:2.9. This is much lower than ratios found in national studies, where indirect costs were normally some multiple of direct costs (Industry Commission, 1995; Mangan, 1993). On the other hand, it is similar to ratios found in industry studies, where indirect costs were ordinarily no more than one half of direct costs (Laufer, 1987; Leathers and Williams, 1984). These comparisons are, however, misleading, because most industry studies omit indirect costs borne by the community or employee. If these costs are excluded from this study, indirect costs decline 74 per cent, leaving the indirect to direct cost ratio at a very low 1:11.3. Several factors might explain the disparity between the results of this and other studies. First, the direct costs of workplace accidents in New Zealand include what are indirect costs in other countries, so that the ratio of indirect to direct costs is necessarily smaller. In particular, ACC funding of health and medical treatment relieves the public sector of all or most of the cost of providing treatment to injured workers. Moreover, ACC compensation entitlements are believed to be more generous, widely available, and easily accessible in New Zealand than overseas, encouraging more people to claim bigger benefits. In Australia, for example, only 45 per cent of work accident victims file claims for compensation (Worksafe Australia, 1994: ix), whereas the ACC maintains that nearly all injured workers in New Zealand do so. In addition, Australian compensation is in many cases limited to small lump sum payments rather than, as in New Zealand, weekly compensation until retirement (Worksafe Australia, 1994). Second, the actual indirect cost of workplace accidents in New Zealand could be larger than the total estimated in this study, because some costs were omitted, given the absence of reliable data, and others may have been underestimated. For instance, the costs of replacing or repairing damaged tools, materials, and machines were not included. However, other research suggests that these costs are usually relatively small, particularly when compared to the costs of lost labour time (see e.g. Leopold and Leonard, 1987). More importantly, the cost estimates for recruitment, selection, and training, for lost labour time, and for full and partial losses of earnings may be too low. Many of the people in accidents are likely to be highly skilled, and so replacing them may cost far more than $1,500. For example, firefighters cost approximately $18,000 to recruit, select, and train (Robinson, 1996). There may be additional labour time lost in caring for accident victims, filling out accident reports, and appearing before, and dealing with, the ACC. Workers may suffer further earnings losses, if they leave ACC to return to work at a lower wage or if they cannot claim ACC compensation, at least from the Employer=s Account, because they have some occupational sickness or disease that is not recognised as being work-related. Third, several direct costs may have an additional indirect component, because of insufficient funding by the ACC. This is clearly the case with the tiny independence allowances for pain and suffering. It is also true for any rehabilitation and medical expenses, borne by the employee or his or her employer, that are either not claimed or rejected by the ACC for administrative reasons. Reimbursements for travel may also be inadequate, given that St John=s Ambulance in Auckland requests a donation of $61 for each accident attended.
Implications
Results from this study suggest that indirect costs are not large in relation to direct costs. As a result, greater awareness of indirect costs is unlikely to motivate extensive efforts at prevention on the part of employers, employees, and the community. Attention to prevention measures is more likely if the employer premiums used to finance direct costs are more closely tied to accident record or the presence of unsafe working conditions.
References
ACC (1987) Population Injury Survey. Wellington, New Zealand. ACC (1995) Annual Report. Wellington, New Zealand. ACC (1995) Injury Statistics 1994 and 1995. Wellington, New Zealand. Andreoni, D. (1986) The Cost of Occupational Accidents and Diseases. 473
Geneva: International
Linda Head and Mark Harcourt Labour Office. Boyd, M. (1994) >One bad apple.= Incentive 168(8): 64-69. Consumer (1996) >What do you pay your doctor?= Consumer 347: 24-25. Department of Social Welfare (1995) Statistical Information Report. Wellington, New Zealand Heinrich, H.W. (1959) Industrial Accident Prevention: A Scientific Approach. New York: McGrawHill. Klen, T. (1989) >Costs of occupational accidents in forestry.= Journal of Safety Research 20: 31-40. Industry Commission (1995) Work, Health and Safety: Inquiry into Occupational Health and Safety, Volume II. Canberra: AGPS. Laufer, A. (1987) >Construction accident cost and management safety motivation.= Journal of Occupational Accidents 8: 295-315 . Leathers, K.L. and Williams, J.D. (1984) The Economics of Farm Accidents and Safety in New Zealand Agriculture, Research Project No. 3146. Christchurch, NZ: Agricultural Economics Research Unit, Lincoln College. Levitt, E.R., Parker, H.W. and Samuelson, N.M. (1981) Improving Construction Safety Performance: The User=s Role. Stanford, Cal: Stanford University. Leopold, E. and Leonard, S. (1987) >Costs of construction accidents to employers.= Journal of Occupational Accidents 8: 273-294 . Mangan, J. (1993) The Economic Costs of Industrial Accidents in Queensland. The University of Queensland: Department of Economics Discussion Paper No. 123. Brisbane: University of Queensland. Miller, T. and Galbraith, M. (1995) >Estimating the costs of occupational injury in the United States.= Accident Analysis and Prevention 27(6): 741-747 . Miller, T., Hoskin, A. and Yalung, M. (1987) >A procedure for annually estimating wage losses due to accidents in the US.= Journal of Safety Research 18(3): 109-119. Pizer, C. (1994) >Recruiting and employing foreign nurse graduates in a large public hospital system.= Hospital and Health Service Administration 39(1): 31-46. Pitt, C. (1996) Senior Advisory Officer Operation Policy, OSH Service, Department of Labour, Wellington, Personal communiquJ. Rawnsley, P. (1996) OSH Service, Department of Labour, Wellington, Personal communiquJ. Robinson, J. (1988) >Hazardous occupations within the job hierarchy.= Industrial Relations 27(2): 241-250. Robinson, J. (1991) Toil and Toxics: Workplace Struggles and Political Strategies for Occupational Health. Berkeley, Cal: University of California Press. Robinson, P. (1996) Corporate Medical Advisor, ACC, and Principal Medical Advisor, New Zealand Fire Service, Wellington, Personal communiquJ. Shalowitz, D. (1990) >Workers= compensation cost controls: firms rate success of efforts.= Business Insurance 24(51): 1, 69. Simonds, R. and Grimaldi, J. (1956) Safety Management: Accident Cost and Control. Homewood, Ill: Richard D. Irwin. Statistics New Zealand (1996) Labour Market 1995. Wellington, NZ: Statistics New Zealand. Stores (1996) >Hidden cost of staff turnover.= Stores 78 (8), 48 Vogt, P. (1995) >Let the numbers be your guide.= Credit Union Management 18(12): 47-49. Walls, C. (1988) >Accident consultations in one month in a semirural town.= New Zealand Medical Journal 8: 372-373. Worksafe Australia (1994) The Cost of Work-related Injury and Disease. Canberra: AGPS.
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