In Search of the Magic Pudding
Compulsory Workers' Compensation: Worker Right or Unnecessary Restriction?
R. Ian McEwin
'Workers' Compensation is a liability neither in
tort nor in contract. ... The parties may choose whether
they will enter into the relationship; but if they
do the employer's liability for, and the worker's and
his dependant's right to, compensation are legal consequences
which are independent of and cannot be controlled by
Dixon J. in Mynott & Orrs v Barnard2
Workers' compensation legislation makes employers liable
for government-prescribed disability benefits if injured
or killed at work, or on the way to and from work.
But do workers gain from legislatively provided 'rights'
to compensation? Increased legal 'rights' to compensation
do not yield the benefits claimed by many. For many
workers, increased legal accident 'compensation rights'
were largely paid for by reductions in previously negotiated
compensation for taking risks. Legislatively imposed
'compensation rights' effectively restrict a worker's
ability to negotiate alternate, preferred, compensation
packages because the 'compensation right' is inalienable.
As a result, workers may suffer welfare losses. Worker
welfare would be improved by permitting workers to
opt out of the workers' compensation system and negotiate
desired accident compensation arrangements directly
Workers' compensation legislation also makes employers
buy insurance to cover their liability on terms and
conditions determined by government. Increasingly,
in Australia, employers have been forced to buy their
compulsory worker disability insurance from government
insurance monopolies. But has increased government
control led to disability insurance being provided
at the lowest possible price, consistent with worker
preferences? Has industrial safety been improved?
This paper argues that, consistent with experience
in other industries, excessive regulation and government
monopolisation of the supply of disability insurance
has increased insurance costs and restricted the availability
of desired insurance policies. Considerable improvements
in worker welfare and resource allocation would be
achieved by reducing the role of government and returning
decisions about industrial safety and disability insurance
to the workplace level.
Background---Common Law Compensation for Industrial
Most societies have developed rules (or tort law) to
ensure injurers compensated victims. However, tort
law did not assume its modern form in the English-speaking
common law countries until the 19th century both because
intentional wrongs were seldom litigated and because
non-contractual, non-domestic accidents were relatively
rare. Industrialisation and the advent of the railways
dramatically increased the numbers of accident victims.
Little is known about the extent of employer liability
for workplace accidents before 1837. In that year (which
preceded the industrialisation which took place in
the latter half of the 19th century in Britain), the
English High Court, in its first reported case dealing
with an employee suing his employer for injuries negligently
caused at work, decided that an employer was not liable
for injuries negligently caused by a co-worker.3
By the middle of the century, English common law courts
had established rules under which a worker might sue
an employer for compensation. These principles differed
from those governing non-contractual relations, being
grounded on the premise that employer liability
was based on an employer's promise, either express
or implied, to compensate injured workers, which
was in turn based on the peculiarities of the workplace
situation. To recover damages, a worker had to prove
that the accident resulted from an employer's lack
of reasonable care (or negligence) in selecting workers
and/or maintaining safe plant and equipment. Reasonable
care was defined in terms of the amount of care a reasonable
man would take in the circumstances. In other words,
employers were made liable in circumstances where they
were likely to have more information about the risks
involved than workers and where they were in a better
position to prevent injury loss (where injury was likely
through defective machinery, etc.). In the remaining
cases, workers were expected to have more knowledge
about the risks involved and a greater ability to prevent
loss. A higher standard of care was required in more
hazardous employment, such as mining. Court concern
with allocating costs to those best able to prevent
accidents suggests industrial safety was perceived
as the main goal of the common law, not compensation.
Employers could defeat most claims by relying on three
common law defences. First, contributory negligence
which ruled out any recovery if the worker contributed,
however slightly, to the accident. Second, assumption-of-risk
which, in accordance with a general belief that courts
should not be involved in voluntary agreements, assumed
that workers willingly accepted the possibility of
injury. Third, common employment which absolved
employers from injuries caused by other workers 'in
common employment'. The assumption of risk and common
law defences effectively meant that employees were
less likely to recover (non-contracted) compensation
from an employer, than an injured stranger. Injured
railway passengers were able to recover, but not injured
railway workers. This supposed lack of equal
access to the law was to prove to be an important argument
against the common law by no-fault reformers. However,
presumed inequality before the law ignored the fact
that where bargaining is possible, risk compensation
can be negotiated before an accident occurs.
In particular, workplace accident compensation was
provided via bargaining between employees and employers.
Additional wages were paid to workers in dangerous
occupations (e.g. coal miners) to enable them to make
their own accident insurance arrangements. Sometimes,
compensation was negotiated between workers and employers
through more generous sick leave and accident insurance
schemes compared to non-dangerous occupations.
Early Legislative Changes to Workplace Common Law
The latter part of the 19th century saw considerable
debate, both inside and outside the courts, on the
extent of an employer's liability for industrial accidents.
Focusing on the doctrine of common employment, trade
unions argued that workers should be put on the same
basis as non-workers. By placing a greater and more
certain financial load on employers, not only would
workers be compensated but employers would have more
incentive to take safety precautions. Employers argued,
on the other hand, that increased employer liability
would have serious consequences for industry. The
Employer's Liability Act was passed in England in 1880,
and served as a model for similar legislation in Australia
and the United States. The 1880 Act displaced common
law liability rules in a number of specific instances
but did not affect the assumption of risk and contributory
negligence rules. Injured workers were put in the same
position as injured strangers for injuries negligently
caused by coworkers---the defence of common employment
was restricted to situations involving defects in plant
and equipment and for situations where the victim was
working under the direction of another worker. However,
the statutory liability was not binding as employers
and workers were allowed to 'contract out' of the statute's
Reformers, shocked that so many workers subsequently
contracted out of the Act's obvious 'benefits', introduced
a large number of Bills into the British Parliament
in the last two decades of the 19th century. Most Bills
proposed the abolition of contracting out and the various
common law defences as well as increases in the maximum
compensation payable. Australian parliaments closely
followed British developments.
Public debate centred around the principle of freedom
of contract---which provided the basis for the common
law doctrine of assumption of risk. Reformers argued
that workers were often in weak bargaining positions
and had little choice but to accept dangerous work.
Unscrupulous employers, it was argued, did not bear
the costs of accidents and so had few safety incentives.
Labour unions and some employers argued that more humane
employers were put at a competitive disadvantage because
they paid more compensation and spent more on safety.
Reflecting the times, no empirical evidence was produced
to support these propositions nor was the extent of
negotiated risk compensation examined. Instead, it
was assumed that giving additional legal rights
automatically benefited workers. Instead, worker rights
to negotiate desired compensation was reduced and replaced
by government fiat.
Accident Compensation in Australia Before Workers'
Unfortunately, little data are available on how injured
workers fared in Australia before the introduction
of workers' compensation. But the available evidence
suggests that while compensation may have been difficult
to obtain through the common law, extensive accident
compensation arrangements existed independently of
the courts. Prior to the introduction of workers' compensation,
injured workers in Australia were largely reliant on
the charity of employers and others; the benefits from
membership of mutual societies such as friendly societies,
trade unions, health societies; employer-sponsored
sickness and accident schemes; government provided
medical hospital care, free dispensaries and other
institutions; and sometimes the common law.
To a large extent workers' compensation replaced these
former, mainly private arrangements.4 For example,
union membership often included disability benefits.
Nairn (1973, p.423) lists accident pay, sick pay, unemployment
pay as common union benefits. Cass (1983, p.21) points
out that two out of six new unions examined (and formed
between 1860 and 1890) included accident benefits in
their rules. The Miners Protection League, formed in
1861, provided medical benefits. This union was to
become the Amalgamated Miners' Association in 1890.
Accident pay provided through that union amounted to
2 per week for 12 months and then 10 shillings per
At the turn of the century about one-third of the
Australian population was covered by friendly societies
in some way. Coverage was concentrated in manual trades
with high accident rates e.g. miners. It has been estimated
that about 80 to 90 per cent of manual workers were
members (see Inglis, 1880, p.2). Australian friendly
societies were based on their British equivalents and
reflected mid-Victorian ideals such as self-help, work
and success. Relations with the trade unions were close,
and both offered members social facilities not available
elsewhere. Many friendly society meetings were held
in hotels, although a considerable number of friendly
societies were also associated with temperance associations.
Middle-class men played a large part in the development
and running of friendly societies, not only reflecting
the tendency for the middle classes to preach to the
working classes, but also because the societies were
often seen as a stepping-stone to political and business
Nobbs (1983) suggests a number of reasons for the
decline of friendly societies towards the end of the
19th century, including: an increase in publicly provided
social activities by governments such as parks, libraries,
museums; a decline in interest in issues such as patriotism,
nationalism and temperance which had been the main
reason for the formation of many societies; the growth
of life insurance which competed directly with societies
for death or retirement benefits; and perhaps most
importantly, the increased intervention by governments
into welfare areas that the societies had pioneered.
Life assurance offices also provided death and endowment
policies. 360,000 policies were in operation in 1901
(out of about 1.3 million employed males) . Most policies
were written by Australian companies who operated with
minimal government control in a highly competitive
environment. Nobbs (1983, p.465) noted that:
'In the 1870s and 1880s the Australian insurance market
had no peer. Nowhere else had policyholders the same
advantages nor was life cover per head of population
greater. The changes in life assurance practice were
to influence insurance business throughout the world.'
State government also provided social welfare benefits
indirectly. Hospitals were heavily subsidised, fees
accounted for only about 10-15 per cent of total hospital
revenues, with half of the remainder coming from government
grants and the rest from private charity and fund raising.
However, self-help was emphasised. Apart from non-employment-related
benefits, employees could obtain compensation from
their employers, either on a charitable basis, through
company sickness and accident schemes.5
A number of income maintenance programs were introduced
at the beginning of this century. Aged and invalid
pensions were introduced in 1901 in Victoria. New South
Wales introduced an age pension in 1901 and disability
pensions in 1907, the Commonwealth in 1908 and 1910
respectively. The schemes were non-contributory, with
flat-rate means-tested benefits. Disability pensions
covered permanent incapacity, irrespective of the source
of that incapacity.
Unemployment insurance was considered by the Fisher
Government in 1911. The Cook Government in 1913 announced
a National Insurance Scheme, to be funded on a contributory
basis, 'covering sickness, accidents, maternity, widowhood
and unemployment'.6 Nothing came of the scheme, partly
because of friendly society opposition. Some government
intervention was designed to encourage the use of self-help
mechanisms. For example, the NSW Government introduced
an Act in 1908 subsidising friendly societies for long-term
Introduction of Workers' Compensation in Australia
The British Workers' Compensation Act of 1897 served
as the model for the introduction of similar legislation
in Australia. Workers' Compensation Acts were introduced
by South Australia in 1900, Queensland in 1905, New
South Wales and Tasmania in 1910, South Australia in
1911 and Victoria in 1914.
British historians have emphasised the importance
of the passage of workers' compensation legislation
in terms of a gain in working class rights, which did
not exist under the common law. Bartrip (1986, p.5),
for example, has said:
'The symbolic importance of the Act was in conferring
a working class right---comparable with the right to
vote or to form trade unions---which, if it did not
remove the longstanding disadvantages of the negligently
injured worker relative to those injured outside the
workplace, promised to circumvent them.'
The Act has been interpreted similarly in Australia,
being seen as part of a 'new liberalism' in Australia
at the beginning of the 20th century (see Crowley,
1974, pp.260-311, and Fitzpatrick, 1969, pp.241-68).
Changing attitudes about the economic role of the State
led to a growing belief that individuals had 'social
rights', to be ensured by government, including the
right to a minimum income. As a result, in addition
to workers' compensation, old age and invalid pensions
were introduced and minimum wages laid down. However,
in contrast to invalid pensions, which were designed
to provide income support for a limited number of disabled,
workers' compensation was '. . . based on the principle
that workers as a class had a collective right, a just
claim, to compensation for work related injury from
their employers' (Cass, 1983, p.80).
While the common law was seen as anti-worker in both
Britain and the United States, the fact that unions
opposed workers' compensation, preferring instead the
abolition of employer defences (and so keeping compensation
in the hands of common law judges) was never explained.
Merritt (1982, pp.76, 81) argues that workers often
used the common law, successfully, to improve employment
'Since it is the worker who stands to lose by legal
enforcement of contract entered with minimal formality
and fleshed out by unequal implied terms, the nineteenth
century workers' attempted insistence on agreements
concluded only after full discussion and acceptance
of express provisions demonstrated a keen grasp of
the way in which the law could be used to protect their
interests within labour relations . . . Even under
the body of law surrounding the Masters and Servants
Act, the rights of workers unable to work through illness
or injury were frequently at issue. While today the
situation has been resolved by legislation providing
compensation for injury at work and by clauses in industrial
awards, 19th century workers attempted to establish
their rights through contract.'
The extensive negotiations about risk and disability
arrangements contradict romantic claims made by some
legal historians that stress a lack of worker power
in the employment relationship and which argue that
workers were forced to accept risk. Workers' compensation
legislation effectively replaced employer/employee
bargaining and imposed conditions on the employment
contract with respect to safety and accident compensation.
Historians and economic historians have largely avoided
examining the introduction of workers' compensation
in Australia. The notable exception is Cass (1982)
who examined the introduction of workers' compensation
in New South Wales. Cass argued that trade unions were
instrumental in the introduction of workers' compensation
in New South Wales through the lobbying of parliamentarians
and pressure on Labor governments.7 Conservative opposition,
she argued, was weakened due to divisions between employers
who opposed the legislation and (mainly British) insurance
companies who supported it. Insurance companies strongly
supported the legislation. It gave them the opportunity
to expand their business at the expense of mutual self-help
groups such as friendly societies. The Chamber of Manufacturers
in New South Wales, fearing high insurance premiums,
responded to the legislation by establishing their
own insurance company---now called Manufacturers' Mutual
Unlike the United States (see Croyle, 1978), employers
groups opposed the legislation, arguing that the insurance
premiums would impose unreasonable costs on industry,
especially for small business. Concern was felt about
the effects of workers' compensation on industry---
which prompted the Liberal Party to propose a contributory
National Insurance Scheme. In the end the view prevailed,
as noted in the High Court, that '. . . the industry
itself should be taxed with an obligation to indemnify
the sufferer for what was an accident causing damage'.9
Apart from Victoria, no State initially required employers
to insure their liability, although a number of politicians
had spoken in favour of a State insurance scheme (see
Cass, 1983). Many employers insured their liability
in any case.10 Within a few decades, all employers
were required to buy insurance from approved insurance
companies. New South Wales introduced compulsory insurance
in 1926 and at the same time established a (competitive)
government insurance office. Queensland introduced
compulsory insurance in 1916 and also established a
State-owned monopoly.11 Western Australia introduced
compulsory insurance in 1925, Tasmania in 1927, the
Australian Capital Territory and the Northern Territory
in 1931 and South Australia in 1932.
By simply imposing liability on employers for certain
amounts in the event of worker injury, workers' compensation
is distinguishable from other forms of early social
intervention in Australia like old age and invalid
pensions. While those other interventions provided
benefits from general taxation revenues, workers' compensation
made no claims on the public purse.
A major difference between workers' compensation in
Australia and the United States was that, in the latter,
workers' compensation was explicitly seen as being
traded for restrictions on common law rights. It was
believed that both employers and employees gained from
the legislation. However, common law rights were retained
in Australia. As mentioned previously, the vigorous
defence of common law rights by trade unions in Australia
does not support the claim that the rights were of
negligible importance, nor that judges were anti-working
class. However, Australian evidence on the actual numbers
of employees compensated through the common law system
either directly or indirectly (through non-litigated
settlements) does not exist.
While there seemed to be a general consensus among
the various political parties in Australia that some
form of industrial disability scheme was called for,
there was considerable disagreement about levels of
benefit and who should pay. There were four unsuccessful
attempts to introduce the legislation in New South
Wales (the first in 1889) and at least six in Victoria.
The principal concern was the effect of increased costs
on industry. The Liberal Party proposed a contributory
National Insurance Scheme. In general, all States adopted
similar legislation which provided for payment of compensation
by an employer to a worker for personal injury by accident
'arising out of and in the course of employment'. By
1913, only South Australia had extended the provisions
to include industrial disease. Even there, the industrial
diseases only covered poisoning (anthrax, lead, mercury,
phosphorus or arsenic). All States, apart from Queensland
and Tasmania, covered workers travelling to and from
Employers were exempted from liability for injuries
which did not disable the worker for a minimum period.
In 1913 the minimum disabling period was two weeks
in New South Wales, three days in Queensland and, for
the remainder, the first week of injury if disabled
for less than two weeks. Maximum limits were imposed
on employer liability under the legislation. For example,
the maximum total liability for incapacity in 1913
was 200 in New South Wales. Employers were not liable
for injuries resulting from the wilful misconduct of
the worker. Minimum periods before which lump-sum payments
could be substituted for future weekly payments also
applied. Most States adopted a six months minimum period.
Not all workers were covered initially. Most schemes
were restricted to manual labour in dangerous industries.
In New South Wales, for example, the Act applied to
manual labour employed in railways, factories, mines,
quarries, wharves, vessels, engineering or building
work and other proclaimed employment. Miners were covered
under similar provisions in the Miners Relief Act,
which preceded workers' compensation.
Workers' compensation simply imposed strict liability
on employers, for government determined benefits, for
injuries suffered by workers in dangerous occupations.
Nothing else changed. Worker rights to sue negligent
employers for full compensation were retained. All
States prohibited contracting out of liability under
the Act, although schemes (without worker contributions)
could be substituted, provided benefits were not less
than provided under the legislation. Substitute schemes
could not be made compulsory. In South Australia, Western
Australia and Tasmania, schemes were permitted which
gave additional benefits in return for worker contributions.
These schemes had to be approved by a majority of workers
as well as the government. Over the years, workers'
compensation schemes have undergone substantial changes.
Benefit levels have increased and coverage extended
to occupational disease and the journey to and from
work. In addition to the earlier income maintenance
and safety objectives, rehabilitation is now also considered
to be of major importance.
Initially, workers' compensation disputes were handled
by the courts, for example in magistrate or district
courts. Gradually the role of the courts was reduced
by legislation, firstly by placing greater emphasis
on arbitration but secondly through the establishment
of separate workers' compensation commissions whose
role was not only to settle disputes but also to fix
premium rates, license insurers and generally regulate
the workers' compensation system in each State.12
Unlike the United States, workers in both Britain
and Australia retained the right to sue a negligent
employer through the courts. Access to the common law
has also been made easier by legislative means, for
example the defence of common employment has been repealed.
However, in the last five years common law rights have
been restricted in some States.
The evolution of the current system has been characterised
by increasing government involvement over the terms
and conditions under which insurance is supplied. At
the time compulsory insurance was introduced, there
was widespread political agreement that employers needed
to be protected from the 'excesses' of insurers, given
a captive insurance market. This concern was understandable
given the uncompetitive nature of the insurance industry
at that time: it was largely controlled by a cartel
of British insurers. With hindsight, a preferable action
would have been the promotion of insurer competition.
Workers' compensation insurers were licensed and subject
to prudential and price controls. Government insurers,
competing with private insurers, also were set up in
some States: Queensland, for example, introduced a
government monopoly in 1916. Private insurers were
required to lodge returns concerning their business.
However, the lodgement of returns was not strictly
policed, nor their accuracy checked (Cooney, S 6.2),
which accounts for the poor quality of data and the
resultant inability of official enquiries adequately
to diagnose the causes of the financial problems in
The Current Scene
Workers' compensation consumes considerable resources
in Australia. In 1982-83 (the latest year for which
aggregate Australian data can be compiled from official
sources), workers' compensation premiums exceeded $1.3
billion, or $205 per worker (in 1986-87 prices). Some
figures from the Victorian WorkCare system provide
more recent data. In 1986-87, reported claims in Victoria
totalled 204,064, or one claim per 7.4 employed persons.
Payments by WorkCare amounted to $333m, and outstanding
liabilities of WorkCare rose from just under $717m
at 30 June 1986 to $2.64 billion at 30 June 1987.
Large increases in premiums in the early 1980s led
to widespread employer discontent, particularly in
the manufacturing and construction industries. Between
1981 and 1983, the average annual growth in the hourly
cost of workers' compensation in Australia was 49.2
per cent. The premiums of some firms in Victoria increased
by 200-300 per cent between 1981 and 1982. State performances
differed. For example, workers' compensation premiums
per worker rose in New South Wales from $67.58 in 1978-79
to $224.90 in 1982-83 (in constant 1986-87 dollars).
Equivalent figures for Victoria were $70.46 and $221.08,
for Queensland $53.51 and $132.99, and for the ACT
$31.52 and $29.41.
Insurers argued that rapidly rising premiums, regulated
by government, were not increasing fast enough to cover
the more rapidly escalating claims. State governments
saw high workers' compensation premiums adversely affecting
the competitiveness of their exporting and import competing
industries. As a result, seven official enquiries have
been conducted into workers' compensation in Australia
in the last five years. But none was able to explain,
satisfactorily, why costs were blowing out. Nor were
the enquiries able to account properly for considerable
differences in workers' compensation premiums and claims
costs between States. For example, in 1984-85, claims
incurred as a percentage of wages varied from 0.82
per cent in the ACT to 2.76 per cent in New South Wales,
to 3.23 per cent in Victoria (Craigie, Cumpston and
Sams, 1986, p.26).
While premiums have in general been rising, the number
of claims made have remained reasonably constant. For
example, in New South Wales the amount of compensation
paid increased from $199.01m in 1977-78 to $387.20m
in 1984-85 (in 1986-87 prices). Claims declined from
244,329 to 223,669 in the same period. The main reason
for the cost increases seems to be increased income
maintenance payments per claim, due to increased benefit
levels and the associated incentives to remain 'on
compo'. These explanations are consistent with overseas
evidence. In the United States, for example, a number
of studies have found that both the frequency of claims
and the duration of time spent away from work rise
with increased workers' compensation benefits (Worrall
and Butler, 1985). Similar problems have been encountered
with the comprehensive accident compensation scheme
in New Zealand (Business Roundtable, 1987).
Why do workers' compensation costs vary so much across
States? Possible explanations include differences in:
labour markets (resulting in differences in willingness
to bear risk or make claims); industrial composition---States have different proportions of less safe industries;
the cost of living; the level of compensation benefits;
the extent of government safety regulation; the extent
and form of government insurer regulation; and the
degree of competition in workers' compensation insurance.
All of these factors need to be taken into account
in evaluating the relative efficiency of each system.
So far this has not been done.
As the official enquiries did not identify the principal
causes of increasing claims, they were unable to assess
whether past government regulation (of safety or insurance)
had contributed to the problems. Nevertheless, more
government intervention was recommended. Major changes
have been made to workers' compensation arrangements
in Victoria (WorkCare), New South Wales (WorkCover),
South Australia (WorkCover) and, to a lesser extent,
the Northern Territory (WorkHealth) since 1985. The
new schemes restrict common law rights and reduce the
role of private insurers.
Past enquiries into workers' compensation, reflecting,
perhaps, the domination of the workers' compensation
system by lawyers, have placed too much emphasis on
making incremental changes to existing arrangements
and have failed to make comparisons of alternative
systems of compensation and safety promotion.
Hampered by legal blinkers, accident compensation has
been seen in terms of finding 'deep pockets' to pay
for increased benefits. Scant regard has been paid
either to the option of facilitating greater competition
in the provision of insurance, or to the promotion
of more enterprise-oriented negotiations about industrial
safety and accident compensation arrangements. Current
government-imposed workers' compensation schemes involve
both compulsory employer liability for government-determined
benefits and the regulated supply of compulsory liability
insurance. The amounts and the conditions under which
benefits are paid have become more precisely specified
by government, and the terms and conditions under which
insurance is supplied have become more constrained.
Alternative sources of compensation through the common
law have been restricted or abolished, and insurance
supply has been concentrated in the hands of State
Some Basic Workers' Compensation Economics
Although everyone would like to eliminate accidents
(defined here to include disease), the reality is that
accidents are costly to avoid. Prevention only can
be achieved by expending scarce resources or forgoing
risky activities altogether. People knowingly risk
personal injury because the benefits of engaging in
risky activities are judged to be worth the costs.
As with other activities, people will typically choose
not to work in a risky job unless there are compensatory
monetary or non-monetary benefits, relative to the
remuneration from less risky jobs. Put bluntly, the
Evel Knievels of this world should not be banned, nor
should they be eligible for subsidised insurance. Given
the risks, Evel fans should pay prices for tickets
sufficient to pay the extraordinary income or the high
costs of insurance, or both.
Public concern about the appropriate level of safety
is diminished if each person is fully informed about
the risks involved and if the full benefits and costs
of engaging in the risky activity accrue to that person
or enterprise. Safety precautions will tend to be taken
by individuals and employers so long as the additional
safety level expected is perceived as worth the additional
costs. The preferred level of safety and the preferred
form of insurance differ between individuals because
people have different attitudes to risk, form of compensation
and the costs of safety precautions. A necessary consequence
of this is that government policy should be directed
at promoting the mechanisms through which people achieve
their desired safety and compensation outcomes, including
a desired range of insurance services.
In practice, accidents are jointly caused, in the
sense that their likelihood depends on the preventative
actions of both parties (or co-workers). Workers were
compensated for accidents before the enactment of workers'
compensation legislation. To attract workers to risky
occupations, employers had to pay higher wages, additional
sick leave, etc. Workers bought disability insurance
through friendly societies and life insurance companies.
Workers' compensation simply replaced, in whole or
in part, risk coverage and compensation arrangements
privately negotiated between workers and employers.
The notion that workers and employers can negotiate
and receive risk and remuneration packages irrespective
of legislatively determined compensation is crucial
to a proper understanding of a number of workers' compensation
issues. While employers will tend to have a comparative
advantage in some aspects of risk determination, workers
also affect outcomes, and, at the enterprise level,
are capable of negotiating preferred mixes of insurance,
safety conditions, work practices and wages. Much of
the recent concern with labour on-costs (reflected
in the 1986 Report on the Costs of Workers' Compensation
in Australia by the Federal Advisory Committee on Prices
and Incomes) is misplaced when it is realised that
workers' compensation replaces other elements of workers'
package of pay, leave, safety and other conditions.
Another misconception relates to the abolition of
common law negligence actions. Risk-related remuneration
can, and typically would, account for the likelihood
of a successful tort action; and if access to tort
actions is abolished, negotiations would seek an adjustment
upwards in other forms of compensation for risk.
Why then have employers been concerned with workers'
compensation rates? Why have some of them lobbied for
the socialisation of what should be competitive insurance
arrangements? One important reason has been the wide
variation in premiums for similar firms in different
States, particularly in manufacturing. This led, it
was argued, to firms in States with high workers' compensation
premiums suffering a competitive disadvantage. Another
problem is simply that governments imposed obligations
on firms, for example, to cover the first five days
compensation, and discouraged innovation in design
of insurance packages capable of offering workers higher
wages, but different rights to accident pay and leave.
Differences in insurer competitiveness and government
actions restricting premiums (and so cross-subsidising
some industries either at the expense of other industries
now or in the future) also have given legitimate cause for employer concern.
Assessment of policy options
Goals of Public Policy Towards Industrial Accidents
The goals of accident policy are non-controversial.
Most official enquiries argue that government safety
and compensation policies should:
- promote efficient levels of safety which means well-informed
decisions by workers about participating in risky activities,
and cost-justified levels of care and safety expenditure
by employers and workers; and
- provide adequate compensation in the event of accidents,
with coverage against loss of income and reasonable
medical, hospital and rehabilitation expenses.
These sub-goals are consistent with the goals mentioned
by a number of official enquiries into accident compensation,
in particular the US National Commission Report and
the Report of the Committee of Enquiry into the Victorian
Workers' Compensation System. However, these goals
should be pursued only so long as the benefits gained
are likely to be worth the costs. In the interest of
safety as well as equity, the actuarial costs of accidents
should be covered by insurance arrangements struck
between those benefiting from the risky activity and
those who are in the best position to reduce accident
Alternative Policy Options
The broad range of policy options by which governments
can promote safety and accident victim compensation
- changing the common law, which shifts the responsibility
for payment of accident losses through liability rules;
- safety regulation;
- compulsory self- (or first-party) insurance, with
varying degrees of control over insurance supply;
- compulsory employer liability insurance, again with
varying degrees of control over insurance supply;
- social security.
Each policy approach has advantages and disadvantages.
Table 1 provides a comparison of the way each option
contributes to safety and compensation objectives.
The common law
Legal responsibility for accident losses can lie where
they fall (no liability or victim liability), or be
shifted by common law liability rules. Two liability
rules predominate in the common law, negligence and
strict liability. Under strict liability, employers
are liable for personal injury
loss, irrespective of their contribution to an accident.
Negligence liability, on the other hand, only makes
careless employers liable for loss. In the last century,
negligence liability was the norm. But over the course
of this century, both through judicial and legislative
changes, strict liability has become more important.
The issue of whether employers or workers should be
liable for accident losses is, surprisingly to some,
not the key to safety and compensation arrangements.
If competitive and efficient disability insurance is
available to workers either through group policies
or employer policies, then different groups, firms
and perhaps industries will opt for different liability
arrangements. As discussed previously, informed workers
will demand extra remuneration to work in jobs with
higher risk of personal injury. On the one hand, if
employers are not liable, the extra remuneration will
tend to be taken as wages and used to buy the amount
of insurance they want. On the other hand, if employers
are liable, the extra labour cost will be met by a
lower wage than in a no-liability situation. Further,
if employers are obliged to compensate injured workers
in an artificial or non-competitive manner through
arbitrary WorkCare-determined rules, which involve
extra costs, this will be regarded as part of the risk-remuneration
package and so wages often will have to be correspondingly
lower, compared to a competitive insurance situation.
An employer negligence rule would be an intermediate
situation. Workers will demand less compensation for
risk under the negligence rule than under the no-liability
situation, to reflect the increased likelihood of obtaining
Workers, then, may ultimately end up with similar
levels of expected real remuneration, irrespective
of the liability rule in force. However, the level
of accident insurance taken out will differ because
courts might make employers pay more compensation to
an injured worker than would follow from the amount
of insurance that workers would buy. Employers take
the full level of accident costs into account, and
have an incentive to take care in order to reduce the
amount of insurance premiums and/or wages they have
to pay. It turns out that workers and employers have
similar incentives to take care under either liability
situation if there are competitive insurance agreements
on safety prevention, and if wages and work practices
are negotiated and monitored by each side.13
While workplace liability is not the key to workers'
risk compensation arrangements, nor safety, it does
matter to the costs of administering the system, since
without employer liability no adjudication or administrative
costs are involved. So long as workers have insurance,
no liability rules may often be preferred, partly because
they overcome the problem of employers with limited
assets under employer liability. Undoubtedly, the reason
strict employer liability was preferred at the turn
of the century was the absence of a social security
net and, perhaps, misperceptions regarding first-party
disability arrangements at that time. Other explanations
revolve around the advantages to unions and insurers
of breaking up the competitive self-help organisations
like friendly societies. In the absence of social security,
employers were seen as convenient sources of funds.
Politically, the approach was acceptable because of
the widespread and mistaken belief that employers did
not have to compensate for accidents in the workplace.
They did, but it was typically in the form of higher
wages than would otherwise have been the case.
Safety regulation attempts to influence safety expenditures
and care by controlling dangerous activities directly,
for example by specifying safety standards for processes
and products and regulating their use, subject to financial
penalties. Both care and activity levels may be affected
by such arrangements.
Due to a lack of information, safety regulators face
high inspection and compliance costs as each plant,
product and so forth must be examined. Also, rapid
changes in technology can alter the optimum level of
safety and form of safety regulation. Safety regulation
involves, then, a relatively expensive administrative
process compared to tort liability; the latter deals
only with a small number of actual accident cases.
And of course safety regulation does not provide compensation.
Insurance, unlike any of the other instruments, can
both promote safety and provide compensation. More
importantly, because the trade-off between safety and
coverage is addressed directly, improved safety and
compensation are likely to result. Governments can
make disability insurance compulsory in two ways: by
making (groups of) workers buy insurance directly or
by making employers buy disability insurance on the
Medicare and social security pay medical expenses and
provide a basic level of income maintenance to all.
As they are financed from general taxation revenues,
they do not impose the costs of accidents on the sources
of risky activities nor do they provide any safety
incentives. As a result, more risky activities are,
effectively, subsidised by taxpayers.
Social security effectively relieves industry of an
obligation to meet a base level of costs associated
with work accidents but does not provide any safety
incentives. And safety regulation, by itself, does
not provide compensation. This line of reasoning suggests
that the major policy design options facing governments
are two-fold: either compulsory worker (first-party)
disability insurance or compulsory employer liability
insurance; and, guidelines and regulations regarding
the supply of compulsory insurance. In deciding between
compulsory first-party and employer liability insurance,
three criteria can be identified. First, the extent
to which the alternative approaches permit tailoring
of policies to enterprise and worker preferences. Second,
the efficiency with which each type of insurance can
be supplied. Third, the extent to which each contributes
to efficient levels of safety.
If the level of compulsory insurance were set at 100
per cent of loss, and, assuming workers and employers
had identical information and could monitor agreements
perfectly at zero cost, there would be no substantive
difference between the outcomes under employer and
employee liability. However, if minimal obligatory
levels of employer liability insurance are set (say
equal to the social security level), then first-party
insurance would be preferred because workers could
then 'top-up' to the desired extent by purchasing additional
The second and third criteria both relate to the efficiency
of supply of insurance. The main issues here are whether
first-party or liability coverage is cheaper and the
relative efficiency of competitive insurance markets
versus a State monopoly. No simple answer is possible
to the first. In large companies, or large unions and/or
worker associations, collection of premiums and risk
assessment may be less costly, allowing cheaper group
insurance for workers. For many small companies, self-insurance
might be no more expensive and yet provide more suitable
terms. The diversity of insurance requirements suggests
that there are no grounds for imposing one form of
insurance. There is no reason, for example, why an
enterprise should not have a mixture of policies. An
employer could take out a liability policy for those
workers who want it, a union could take out group cover
on behalf of its members, and other workers could take
out their own insurance contracts.
The more important issue is whether insurance should
be supplied through competitive private insurance markets
or by State monopoly. Despite its importance, the recent
official enquiries in Australia have failed adequately
to deal with this issue. One important reason for this
is the ideological belief that workers' compensation
is part of social security and so should not be in
the hands of private enterprise. The Victorian Trades
Hall Council, for example, in its submission to the
recent Victorian enquiry into workers' compensation
'The Trades Hall Council is committed in principle
to the concept of a single State instrumentality for
the handling and processing of workers' compensation
claims. It is philosophically abhorrent to have control
of a social service in the hands of private enterprise'
(quoted in Cooney, 1984, S 5.10).
This attitude is naive. If we genuinely are concerned
with worker welfare, then we should be concerned primarily
with ensuring that maximum benefits are paid from limited
compensation resources, not with philosophical stances
that are likely to disadvantage workers.
Data are not available to give definitive answers
on the relative merits of competitive versus monopoly
insurance supply. However, the overwhelming empirical
evidence from other industries is that inadequate competition
(e.g. in the financial sector, of which the insurance
industry is part) leads to higher prices and to less
incentive to control internal costs, creating a strong
presumption in favour of competition. More careful
analysis of the problems caused by excessive regulation
has led to a trend towards more competitive workers'
compensation arrangements in the United States (Williams,
1986). The Victorian Workers' Compensation Enquiry
asserted (S 5.12) that a government monopoly had advantages
over private insurers because the profit element was
removed and because State monopoly was excused from
State taxation. In a national context these claims
are quite false. First, even if a government monopoly
does not have to make a profit, there is an opportunity
cost of using the funds involved. Lower workers' compensation
premiums due to the absence of a profit element almost
certainly will be more than offset by the losses resulting
from using those funds in a more productive use. The
same point applies to the taxation argument. The reduction
of taxation revenues means other public spending opportunities
are lost or additional taxation is required elsewhere.
The social benefits of these forgone activities must
be compared, from a public viewpoint, with any advantages
gained from lower workers' compensation premiums.
The only other serious argument in favour of a monopoly
is the advantage of size. No recent empirical evidence
is available on scale economies in workers' compensation
insurance. However, the large number of private insurers
in nearly all States in the 1970s suggests scale economies
are reached very quickly. Competition promotes efficient
risk classification. Insurers have an incentive to
attract low-risk customers away from competitors by
offering lower rates or innovative policies. This process
also serves to inform customers about the actual risk
they face and gives them an economic incentive to reduce
risk. State monopoly insurers have insufficient incentives
to promote efficient levels of safety by engaging in
more finely tuned merit-rating and dissemination of
information about accident risks.
Moreover, public insurers may find themselves under
political pressure to subsidise particular groups in
particular high-risk industries who have the most to
gain. And they also have a resulting tendency to suppress
access to information on claims, risks and difficulties,
largely out of a desire to hide information on cross-subsidies.
This has happened already in New South Wales where
the concept of 'community rating' has been introduced
to '. . . overcome economic circumstances as in the
case of trade threatening manufacturing' (NSW Government
Discussion Paper, 1986, p.46).
In Victoria, it has been remarked that the origins
of WorkCare had much to do with some influential employers
managing to persuade governments to 'socialise' their
risks, rather than look to more competitive and fair
solutions appropriate to their firms and industry,
or to better risk monitoring at the enterprise level.
The ability of governments and powerful employers to
use the workers' compensation system for other ends
is a cause for concern, particularly as subsidies to
relatively unsafe industries and production technologies
mean that their level of activity is greater than otherwise.
As a result of this artificial risk-spreading, the
number of accidents is probably greater than otherwise
because relatively unsafe industries are encouraged
to expand (as premiums are less than actuarial costs)
and relatively safe industries are discouraged (as
premiums are greater than actuarial cost).
Various surveys of costs of provision of insurance
have noted that the ratio of benefits paid to premiums
received is generally higher for public insurance companies,
and have then proceeded to assert that a government
monopoly scheme is superior to a competitive industry.
This line of argument is subject to serious flaws.
At worst, a high ratio of benefits paid to premiums
received would be due to underfunding or to the overpayment
of claims. More subtle reasons for differences include
differences in the quality of service offered (such
as supplying too little safety advice, inadequate claims
investigation, inadequate monitoring of claimants).
The check to administrative waste is, in any case,
competitive entry, and this is prevented with a government
Monopoly insurers also have insufficient incentives
to minimise costs. When overall funding is largely
unconstrained, the government monopolist has options
to request price increases to cover inefficiencies
on a cost-plus basis, or even to fund deficits from
general revenue. Often, there are incentives to promote
programs publicly to satisfy political constraints,
irrespective of worth. Monopolies have insufficient
incentives to reveal or solve problems in the system
that conflict with managerial goals. For example, solutions
to excessive claims will be biased towards more employment
of staff rather than improved monitoring of safety,
assessment of risk and adjustment of premiums. By contrast,
in a competitive industry, with the threat of new entry,
private firms have a profit incentive to provide new
products more attuned to industry and worker needs
and to reduce costs below those of competitors.
We need efficient and competitive insurance arrangements
that give workers the cover they want at least cost,
and which also provide incentives for appropriate safety
prevention by workers and employers and which facilitate
proper monitoring. This is unlikely to be achieved
by the current practice of precluding workers and employers
from negotiating their own workplace safety and risk-compensating
arrangements. Excessive government regulation of insurers
and State insurance monopolies are part of the cause
of higher costs and a poor safety record in Australia.
Legislative intervention in workplace disability and
insurance arrangements, rather than enhancing worker
'rights' and welfare, has unnecessarily restricted
efficient levels of disability coverage and insurance
supply. Current WorkCare style policies are, we suggest,
likely to lead to more not less claims for accidents
and to worse insurance outcomes than if competition
was fostered in the private sector. The preliminary
evidence from WorkCare in Victoria and from the New
Zealand experience suggests that a government monopoly
does not improve matters---on the contrary, it is far
worse than allowing normal but competitive insurance
processes to prevail, with government setting some
basic ground rules, for example in relation to compulsory
insurance and insurance company prudential requirements.
1. This paper draws on 'Safety, Disability and Compensation',
in J. Freebairn, M. Porter and C. Walsh (1988).
2. (1939) 62 C.L.R. 68 at 91 (High Court of Australia).
3. Priestly v Fowler (1837) LJ. EX. 42.
4. McEwin (forthcoming 1988b) provides evidence that
coal miners were paid compensation for taking risk.
This occurred despite the existence of Industrial Tribunals
which said they would not pay 'blood money'.
5. Cass (1983, p.87) cites evidence that the Colonial
Sugar Company (CSR) provided a better workers' compensation
scheme than one proposed in 1889, and that large companies
such as Burns Philp had always provided paid sick leave.
6. Ministerial Statement CPP 1913, Vol.III, p.137,
quoted in Kewley (1973, p.141).
7. As does Sutcliffe (1967, p.70) and Fitzpatrick (1968,
8. Pursell has noted that insurers were also 'the only
significant group which supported the extension of
the early Employers Liability Acts' (1964, p.321).
9. McGuire v The Union Steamship Company of New Zealand,
(1920) 27 C.L.R., p.583.
10. This contrasted with the situation in the United
States where many workers' compensation statutes made
employers buy insurance. States that did not make insurance
compulsory removed common law defences (employee negligence
and assumption of risk) for non-insured employers (see
11. Perhaps surprisingly, insurance was not made compulsory
in Britain until 1946, when workers' compensation was
replaced (the coal industry was made to buy insurance
12. The introduction of specialised workers' compensation
boards comprised of compensation experts did not necessarily
lead to a lessening of legal influence. For an account
of the re-legalising of workers' compensation in the
United States see Nonet (1969).
13. These points are taken up in more detail in McEwin
Bartrip, P.A., 'The Rise and Fall of Workmen's Compensation',
Manuscript, 1986, Centre for Socio-legal Studies, Oxford
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Why HR Nicholls?