21 May 2012  Research & Ideas

OSHA Inspections: Protecting Employees or Killing Jobs?

As the federal agency responsible for enforcing workplace safety, the Occupational Safety and Health Administration is often at the center of controversy. Associate Professor Michael W. Toffel and colleague David I. Levine report surprising findings about randomized government inspections. Key concepts include:

  • In a natural field experiment, researchers found that companies subject to random OSHA inspections showed a 9.4 percent decrease in injury rates compared with uninspected firms.
  • The researchers found no evidence of any cost to inspected companies complying with regulations. Rather, the decrease in injuries led to a 26 percent reduction in costs from medical expenses and lost wages—translating to an average of $350,000 per company.
  • The findings strongly indicate that OSHA regulations actually save businesses money.

 

With an election looming and the economy continuing to struggle, the effectiveness of government regulation has become a political football. While advocates hold regulations up as necessary to protect public health and safety, critics see them as arbitrary and costly to business, reducing wages and killing jobs at a time when the United States can ill afford to lose them. Few regulatory agencies have a more direct effect on businesses than the Occupational Safety and Health Administration (OSHA), the federal agency responsible for enforcing regulations to keep workplaces healthy and accident-free.

"If people are skeptical of OSHA, it's likely based on anecdotes. The difference in our study is we are looking at hundreds of companies over a long period of time, and we find that those anecdotes are not typical."
—Michael Toffel

"Needless rules and onerous regulations are often roadblocks to economic growth and job creation," groused one congressman during a House subcommittee hearing on OSHA last year, sharing the private frustrations of many employers. The debate over the agency has gone on for years, in part because there has been little evidence to prove the case for either side. In order to get the biggest bang for taxpayers' bucks, OSHA typically inspects companies most likely to have problems, often following accidents and complaints, stacking the deck with companies that are worse than average.

"Where there is smoke, there is usually fire, so the fact that government inspectors find safety problems is not surprising," says Michael W. Toffel, an associate professor and the Marvin Bower Fellow at Harvard Business School.

At the same time, when problems are resolved, there's no way of telling whether the inspections themselves helped fix them, because the law of averages implies that a company with a bad year would usually improve the following year even without an inspection. "When they do find a problem, it's not entirely obvious that it wouldn't resolve itself anyway," he says.

Toffel has long studied the effectiveness of regulations, focusing on voluntary measures. When he and colleague David I. Levine heard of a program at California OSHA to conduct randomized inspections of workplaces, they realized they had the perfect real-world experiment to settle the debate over workplace inspections.

"When I learned that Cal-OSHA was conducting some of its inspections at random, I felt almost an obligation to analyze that experiment," says Levine, a professor at UC Berkeley's Haas School of Business. "To let these debates on OSHA and other regulatory agencies continue for another generation when this experiment had already been done seemed inexcusable."

Little did the researchers know at the time how difficult it would be to extract the data for analysis. That task fell to Toffel, who was still completing his doctoral studies at Haas when the research began in 2005. "We received all this data from Cal-OSHA on cassettes, the likes of which I have never seen," Toffel laughs. "They were Memorex tapes about three-quarters of an inch tall and six inches square. We had to hire someone to make them machine-readable."

The team brought on Matthew Johnson, then an HBS research associate who is now an economics doctoral student at Boston University, to help with the data analysis.

Thus began the long saga of extracting statistics on inspections and sorting out which were randomly assigned, which followed accidents, and which followed complaints. In addition, Toffel and Levine essentially became deputized by another California regulatory agency to gain access to workers' compensation data. Because the data were collected at the company level, the researchers limited their analysis to firms with only one plant, where the effects of an inspection on injury rates and costs could be clearly identified. Finally, they matched companies by size, industry, and other characteristics to end up with some 800 companies. Half of the companies had been subject to random inspections; half of them were eligible for inspections but not chosen.

Surprising findings

The results of their analysis, published in Science last week, are definitive: inspections worked. Compared with uninspected firms, the companies subject to random inspections showed a 9.4 percent decrease in injury rates. What's more, the findings were consistent for both large and small accidents. "We thought our results might have been driven by fewer big problems, like preventing storage racks from collapsing and other major accidents; or perhaps by a particularly dramatic decline in smaller injuries prevented by workers more regularly wearing personal protective gear," says Toffel, who worked as an environment, health, and safety manager in the private sector before pursuing his doctorate. "But we found it to be an across-the-board effect."

Just as important are the findings about the costs to companies of complying with regulations. Testing every measure they could find—jobs, wages, sales, and credit ratings among them—the researchers found no evidence (within the margin of error) of any cost to businesses that had been inspected. In fact, quite the contrary: the decrease in injuries led to a 26 percent reduction in costs from medical expenses and lost wages, translating to an average of $350,000 per company. While those costs would be felt most immediately by the firms' workers' comp insurance companies, over time that would translate to lower insurance premiums for the employers.

In other words, those who charge that OSHA regulations cost business money have it completely wrong. In fact, the regulations save money. The magnitude of the results surprised even Toffel and Levine, who expected perhaps a small savings if any. But the strength of the findings, they say, should persuade even skeptical antiregulatory critics.

"If people are skeptical of OSHA, it's likely based on anecdotes," Toffel says. "The difference in our study is we are looking at hundreds of companies over a long period of time, and we find that those anecdotes are not typical. If they know of a company that has been shut down, that is not typical." In fact, the inspected firms were just as likely to be in business at the end of the study period as the control firms.

Of course, a single study cannot settle the debate over regulation, or even the debate over OSHA. This study is limited to one regulatory agency in one state; other states and other agencies could show different results. One thing the research does show, though, is the value of randomized inspections as a way to help gauge regulations' effectiveness. What's more, say Toffel and Levine, the potential benefits from randomizing isn't limited to government inspections, but can also extend to the private sector in the form of randomizing the deployment of new safety, environmental, and quality programs.

But randomizing, of necessity, involves a trade-off. Focusing on short-term cost-effectiveness often leads managers to implement new programs at sites or at times when they think they will do the most good. But such targeted interventions make it impossible to evaluate the program's overall effectiveness, as one could with randomized deployment.

"There is a perceived cost in doing a portion of the work in a randomized fashion," Toffel says. "But if you want to learn, it requires an investment and some patience. You have to be willing to delay or forgo deploying a new program at some of the neediest sites in order to evaluate whether the program is effective." Or as Levine puts it: "It's costly to learn, but it's more costly to be ignorant."

To read more:

If you'd like to read the researchers' article in Science, "Randomized Government Safety Inspections Reduce Worker Injuries with No Detectable Job Loss," visit Michael Toffel's Publications & Course Materials page and click on the article link.

About the author

Boston-based writer Michael Blanding is a fellow at the Edmond J. Safra Center for Ethics at Harvard University and author of The Coke Machine: The Dirty Truth Behind the World's Favorite Soft Drink.

Comments

    • Larry Evans

    Your study began in 2005 and I assume that it was completed in 2010. I would also assume that the savings you indicate would have included Workers Compensation premium paid during this period. Did you consider that the Workers Compensation rate system decreased by some 60% from 2004 to 2009 due to changes in the WC benefits structure? The State wide WC premium decreased from about $18 billion a year to some where near $8 billion. Is this adjusted for in your calculations?

     
     
     
    • Jim Forbes
    • MBA 1959

    It is refreshing to hear some factual material regarding regulation instead of the constant stream of invective sent out by the Tea Party and the Republicans about all regulation is bad. Workers need protection and oversight from over zealous owners of businesses who lose sight of worker safety and well being in pursuit of profits.

     
     
     
    • John
    • Former CEO, Consolidated Beverages

    When OSHA was passed into law in 1977? under Jimmy Carter, it might have been for reasons of workplace safety. But like any good law passed by Democrats, the dirt was in the details. Unions quickly saw its possibilities as leverage against businesses and would call in an OSHA inspector as retaliation. Since much of safety after the first wave of improvements was arbitrary, employers were cowering from the threat.

    All this was just management/labor skirmishes until foreign competition began to emerge in the 1980's. Now OSHA regulations, which kicked into overdrive, driven by regulators and safety suppliers, rendered many business's cost structures uncompetitive. Add in the EPA, building codes, high business taxes, and the myriad of other fees and penalties and is it any wonder that manufacturers left for foreign shores?

    I never read about the following factor that impacts negatively on employers but maybe it should be studied. That is the "wear out" factor. I know as businessmen we are supposed to seek the highest after tax rate of return, but an oppressive government regulation mentally wears you down and makes you more likely to close up shop.

    As with OSHA, an agency that sends shivers down your spine, if government is for sale and the deck is stacked against you, you are likely to seek greener and more friendly pastures.

     
     
     
    • Paul J. Lawonn

    Having spent 34 in the safety business, I have found that safety standards and safety inspections by OSHA are necessary. In my career I worked as a safety manager for two large manufacturing companies in Southeastern Wisconsin and subsequently consulted with more than 100 manufacturing firms through my consulting business. If there were no safety standards/regulations and no threat of inspections and potential penalties, it has been my experience that providing safe work and maintaining a safe work environment would take a back seat to productivity and profitability. OSHA has improved their methodology for conducting inspections and they are going after the bad actors. Considering the national average of one workplace fatality per day hasn't changed it is obvious there is a need to continue pushing for safer work practices with senior leaders and the culture found in organizations. The current Significant Violator Enforcement Program run by OSHA works to target culture and systemic issues for large companies with multiple work locations. This article is correct that long term financial gain can be achieved by providing safe work for employees and maintaining a safe work environment. This is accomplished by reductions in workers' compensation cost, reductions in machine down time due to improved preventive maintenance programs, and long term reductions to insurance premiums. The reverse of that is also true - big money pits exist in organizations with bad safety performance. As our manufacturing workforces age and become more multinational, the need for comprehensive safety programs and enforcement is needed. As the complexity and speed of manufacturing equipment increases, safety standards need to be ever-evolving to address new hazards. Leadership must continue to focus on providing safe work to employees and maintaining safe work environments. Left to themselves, safety is not always the priority; the old maxim that states 'what gets checked gets done' is very true for safety just as it is for quality.

     
     
     
    • Peter McCann
    • Consultant, McCann Corporate Consulting Associates

    This study is not the definitive, end-of-all-arguments study. There may be refinements required, there may be cross-jurisdictional comparisons required. But, at last, there is a rigorous study that establishes a base for scholars to build on. My CEO experience is that companies and workers are prone to taking the expedient approach; I believe in randomized senior management inspections (the old MBWA) and in governmental inspections. But, my views are based on limited, personal experience. Now, qualified scholars are applying data-based analysis. This is potentially a seminal paper. Well done. Let's see more research. This is a superb beginning!

     
     
     
    • Anonymous

    Your conclusion misses the mark. The companies that had injuries saved money, but those that haven't had injuries and are subject to the same regulations and have spent a significant amount of money to comply. Those companies that have developed processes to avoid injuries without spending money are still forced to comply with regulations that are very costly continuing to drive up the cost of health care. Ridiculous!

     
     
     
    • Samuel Reich
    • Engineer, anonymous

    With the exception of civil engineers most engineers did take any course in codes. Small manufacturers have one or two degree-ed engineers on staff. They are not the boss who has the final say on spending of manufacturing procedures. But may have combustible dust coming off grinders that must be exhausted and toxic solvent fumes that also must be exhausted. If the government does not set the standard and research what is safe who will.

    Obviously not the one or two technically trained workers with little power in a small firm that has no medically trained staff. Who will say how many part per million of a toxic substance must be dilute-ed to to be safe. Or what is suitable standards for dust exhaust system or noise. Who make the managers of a firm adapt those standards.

    Admittedly, the regulations are not the best and must be enforced better. But that is the cost of bad government. There is hardly any funds for independent research by the regulating agencies which depend on industry to give them ideas. The inspectors are of low quality and poorly trained. The agency heads are political often ideological. The schools and press must educate the public to the fact there is things like toxins. radiation, noise and combustible materials needed in the modern world that must have standards set for them and enforced.

    One has the same problem in building codes, I know by experience that some districts enforce them and some hardly do. But they have been known to save lives particularly in earth quakes.

     
     
     
    • Samuel Reich

    The fear OSHA and building inspectors where the only thing keeping the managers in my firm from playing engineer. Until the building inspector came they put up flimsy enclosure worker fell through. Noise limits and machine guards would be non existent. Fires would have been worst. They have limit or no technical training.

    I design some of the equipment and I am a experienced engineer. But look to regulations to set goals because I have no limit personal experience with all the safety problems and small firms do not have resources to test and rate the toxicity and flammability of all the things they use.

    Having taken some civil engineering courses (not my engineering degree), I can say for certain that civil engineers are trained to design to code for the most part. Without a good building code most Los Angels would fallen in Encino earthquake. Instead fallen building where
    rear.

    I has to a government function and people writing the rules have to be know the technical aspects and human costs of what they are doing. Political hacks will do harm.

     
     
     
    • MM Pattison CSP
    • Loss COntrol Consultant

    As with any other study, show me the data! After 40 years of loss control consulting in the insurance industry I would suggest that Saving 26% on workers compensation premiums can be misleading as there are many variables, like rate filings that can cause premiums to rise and fall. The then current "soft" market could also reduce prices in a competitive situation. that said, I am suspicious of the $355K average savings and would like to see the catagories where it was saved. Last, I have never in my career seen OSHA come in and generate citations on things that were actually causing the accidents at a business - something insurance reps do on a daily basis.

     
     
     
    • Amond Barboza-Ross
    • Safety Director, Private Construction

    1) OSHA was instituted by Presidential Executive Order by Richard Nixon in 1970 and enacted by Congress in 1974.....so sorry it was a REPUBLICAN and Democratic program driven by a 20% increase in workplace injuries that was a burdensome COST on both American business and the American TAXPAYER.

    2) The Hazardous Material and Workplace Hazard Exposure Standards that expanded and changed the focus of OSHA were enacted throughout the 1980's during the administrations of Reagan and Bush....who amazingly seem to have both been Republicans.....why would they do this......the cost impact on American business and the American TAXPAYER was a costly burden and a negative drag on the American economy.

    3) We know from numerous studies, the last being a Standford Study in 2004, that show that for every dollar spent on safety the return to a Company is $2.50. And the cost of every injury has soft dollar cost at 3 to 5 times the hard dollar medical and disability cost of every injury.

    4) Further we know from studies, that the discipline of safety when instituted into the workplace.....improves work productivity.....due to IMPROVED planning and organization.

    5) Working for a private company for the past 14 years we have found that NOT having injuries in fact save us money BECAUSE we manage our safety to not only meet the OSHA Standards but to exceed them......by not injuring our employees we saved over $1000.00 per employee in Workers Comp hard dollar cost and from $3000.00 to $5,000.00 per employee in soft dollar cost.

    6) OSHA is not a burden, it is but a guide post in meeting our social obligation to provide our workers with a safe and healthful work environment. And by exceeding the minimum standards (OSHA), as a Company we have found that safety is an important profit center which has kept us in business during this recent difficult economic time.

     
     
     
    • Anonymous

    I agree OSHA and the regulations serve a benifit to employees. The inspection process and the actions of inspectors needs to be addressed. When you are working in a high risk environment at elevation and you are given props for how your workers are performing their tasks and the company's commitment to safety, there should be some discreation given to the employeer. It should not be turned into a citation seeking opertunity. To be cited for a coffee pot plugged into a RPT (by an employee) and cited as a serious violation is not what the department was set up for, if you truely believe that OSHA is there to protect employees. That one situation destroyed years of building up OSHA as an employee benifit. The attitude now is they are just out to get us not protect us. With or without OSHA if you really care about your employees you rates will drop.