The value of a Wellington worker’s life (updated)

01/06/2012 § 4 Comments

Updated: I’ve corrected the expected value calcs.

The Christchurch earthquakes have made the whole country more focused on earthquake risk. It has changed the Wellington market for office space, for example, with businesses now putting more weight on earthquake safety.

But have we put enough weight on it?

One way to look at the problem is with expected value. Expected value is calculated as the probability that something happens multiplied by the size of its impact. From this paper from University of Canterbury, the probability of a large earthquake in Wellington in the next 50 years is about 5% (page 4 — see the disturbing Russian roulette pictures). From the Dominion Post today, experts estimate that a 7.1 magnitude earthquake will kill 1,500 people. The Value of a Statistical Life is about $3.5m.

1,500 x $3.5m x 0.05 = $5,250m. $262.5m.

That is, given the known risks of earthquake, we should be willing over the next 50 years to invest over $5 billion $26om on earthquake safety in order to save the lives of people in Wellington. If we think that saving all those lives is impossible (which it likely is), then we can scale the total back. For 1,000 lives saved, the amount is $3.5 billion  $175m. This calculation doesn’t say anything about the 13,000 injured however. They need to be added in, too.

This is an example of an explicit cost-benefit analysis of the trade-offs we might be willing to make. We can spend some money to make buildings safer and save lives, or we can spend it on other things that also have value (health, education, and margaritas).

Dear reader, before you accuse me of being a heartless economist, let me point out that decision-makers are already making this trade-off. The Dom Post article is about the possibility that workers could strike to gain better workplace safety. It quotes an employment lawyer:

“Workers are entitled to a safe place of work. The law is clear on that. [But] I’m sure you can’t go on strike in every structure that doesn’t meet the earthquake code, otherwise half of Wellington would be on strike. I don’t think the courts would countenance that.”

There’s the trade-off. Yes, it would be nice to have a safe place to work. Workers are even ‘entitled’ to one. But…actually providing one? Well, that could be inconvenient. So, it probably won’t happen.

At least my calculation is transparent and explicit. (Updated: and now  it is even correct.)

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§ 4 Responses to The value of a Wellington worker’s life (updated)

  • We’ve gotta move towards a liability regime where building owners have to buy insurance for the cost to tenants and passers-by if the building falls on them. $3.5m per fatality caused by the building if the building isn’t to code. Insurers set premiums. Then owners either refit or tear down. At the same time, start paying explicit subsidies for heritage amenity provision so that folks with awesome but costly buildings don’t tear down where it would be inefficient to do so given building’s amenity value to others.

    • Bill says:

      I was also wondering about individuals paying into an earthquake-strengthening pool as insurance against sub-standard buildings. A rough calculation is about $700 $35 per year per person for Wellington workers to pay the full $5b $260m over 50 years. This is true ‘life insurance’. Not sure how to set it up so that those who pay in actually receive the benefits. Maybe the PSA can work with gov’t ministries to part-fund earthquake strengthening in buildings occupied by their members (as long as the tenancy agreements are sufficiently long)?

  • […] Kaye-Blake starts running the cold calculus on the weight we ought put on earthquake safety. That is, given the known risks of earthquake, we […]

  • […] Kaye-Blake starts running the cold calculus on the weight we ought put on earthquake safety. That is, given the known risks of earthquake, we […]

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