VSL is BS?
2008-05-29 · Original WordPress address
Gabriel wants to talk about SVL or "statistical value of life" (aka VSL). Where would we be without acronyms.
First, why should we have such a thing? Isn't putting money value on human life too icky to contemplate? If we have such a value, wouldn't it suggest Bill Gates could buy our lives? Would it be condoning slavery?
Answers: because we have to, yes but someone's got to do it, no and really no. Simply put: there's no way to know how much money to spend on life preserving/extending goods and services if we don't have a sense of how much its worth to us to preserve that life. "Life is priceless" is a nice sentiment, but taking it literally, and via a sufficiently snarky reductio ad absurdum, this refrain would suggest we spend infinite resources making sure people don't get the slightest owies. See how absurdum that reductio would be?
Anyway, how much I spend on air bags for my bicycle or how much time I spend indoors instead of braving the mean streets of Davis ((Bikers don't think they need to follow road rules.)) reflects the value I give to my life. If I value my life more, I'll spend more time in bed. Usually, I don't spend all my time in bed so I can't have an infinite value for my life. If I value my life less, I'll spend more time sky-diving. Because I'm not spending all my time jumping out of perfectly good airplanes, the value I give to my life can't be zero. Somewhere between zero and infinity, then, you'll find the value of my life. The things between zero and infinity are called numbers and that's all economists are doing when they assign a money value to life; they're assigning a number to that subjective value we all have in our heads anyway.
There's a couple of things we'd expect to be true about that number:
- It shouldn't vary too much between different types of people
- To the extent it does vary, it should do so primarily because of the underlying difference in risk preferences of individuals
- It shouldn't vary too much by age except in the last moments of life
- It should be big in any case. It would be really disappointing (and unbelievable) if economists said lives were worth pocket change (even, or especially, for the infirm) .
With my limited imagination, I can think of two ways to put a dollar value on a human life. The first is to use lifetime income or the slight variant, the income yet to be earned. In other words, just add up pay checks. This breaks a bunch of the rules listed above, but mostly it violates #2 and #3.
Another way to come up with a dollar figure is to look at how much money people spend on safety equipment (willingness to pay) or how much extra money they earn doing dangerous jobs (compensating differentials) relative to mortality rates. The fancy folks down the hall that specialize in Public economics call this the value of a statistical life (emphasis on the "statistical").
There's lots of estimates of this value, but most put it between $4m and $9m ((see Viscusi and Aldy. They find safety is a normal good, unions are associated with higher hazard pay and VSL declines with age.)). This method does an OK job not breaking any of the above rules. Take for example the estimates showing a 10% increase in income leads to a 5% increase in VSL. This may seem disturbing at first, but assuming I've done my marginal effects calculations right, this values Americans at the poverty line at $2.5m or so ((and Bill Gates at $1.5B, but he may be slightly out of sample)).