How Unobservable Productivity Biases the Value of a Statistical Life

Abstract

A prominent theoretical controversy in the compensating differentials literature concerns unobservable individual productivity. Competing models yield opposite predictions depending on whether the unobservable productivity is safety-related skill or productivity generally. Using five panel waves and several new measures of worker fatality risks, first-difference estimates imply that omitting individual heterogeneity leads to overestimates of the value of statistical life, consistent with the latent safety-related skill interpretation. Risk measures with less measurement error raise the value of statistical life, the net effect being that estimates from the static model range from $5.3 million to $6.7 million, with dynamic model estimates somewhat higher.