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Wednesday, September 2, 2015

What Is Risk Worth?

Are risky jobs inherently underpaid?

What is risk worth?

Firefighters require physical bravery for their high-risk profession. But how much should they be compensated for bearing that risk? What about other dangerous professions?

I once overheard an argument that most average citizens would not be willing to bear the risks firefighters face, except at much higher salaries. The conclusion was that firefighters should be paid more because most non-firefighters wouldn’t take their jobs, except at higher pay.

But this is flawed reasoning. The amount of compensation most people would require to bear such risks is irrelevant. The question is how much those who might actually consider being firefighters must be paid to get them to apply for the job.

The necessary risk premium is far less for the self-selected group of potential applicants. Why? Because those who value a job’s positive aspects more or dislike its negative aspects less, compared to their other options, are more likely to want it. And in competitive labor markets, users benefit from the lower costs that result.

But when labor markets aren’t competitive, as is common when government is the employer, we frequently observe something different. Openings for those firefighter jobs often trigger a landslide of applications, revealing that they pay substantially more than necessary to fill those jobs. And those higher labor costs hit taxpayers in the wallets.

This is part of a series of micro-blogs by Professor Galles responding to frequently asked questions on economic issues. If you have a question, [email protected]

  • Gary M. Galles is a Professor of Economics at Pepperdine University and a member of the Foundation for Economic Education faculty network.

    In addition to his new book, Pathways to Policy Failures (2020), his books include Lines of Liberty (2016), Faulty Premises, Faulty Policies (2014), and Apostle of Peace (2013).