The economic value of a life, or value of a statistical life (VSL), is a dollar amount that an individual or society is willing to pay for the purpose of avoiding the mortality of one individual. A controversial and contentious subject, intuitively many are hesitant to give credence to the belief a life may be valued economically in any meaningful way. Philosophical and economical criticisms exist both against the whole project of valuing a life (are all aspects of a human life comparable, and reducible to a dollar value?), as well as within the project of valuing a life (is assessing risk taking behaviours the best approach, or are survey studies?). It is nonetheless a necessary concept for policy in the areas of health, insurance and transport, amongst others. It allows for the practical allocation of resources, and investment in cost-effective technologies. It also provides an interesting example of a measure of economic inequities that exist in our world. If we hold morally that all human life has equal value, what are we to think of the tension that exists between this moral position and the differing VSL placed on lives across the globe? What factors are driving this gap, and are they a fruitful area of focus in attempts to improve the wellbeing of the global poor?
Methods of valuing life
In economies, the value of a good or service is in large part determined by the market, supply and demand. There is no such market for human life, and thus alternate methods must be used, which provide highly variable results.
A measure on the value of a human life is an important factor in policy decisions and research. However, a supply-demand economy does not exist for human life, and thus we need to take a more theoretical approach. I will outline a few key methods here, adapted from this high yield summary from Social Value UK. There is no one accepted or unifying method to determining a VSL, but a multitude each with their own advantages and disadvantages.
A crude method - Human Capital
Is a person simply worth what they earn? This is the basis of the human capital approach to measuring VSL. The potential earnings of the individual are approximated based on age, life expectancy and potential future increases in earnings. It is thus sensitive to key demographic factors, and is easy to calculate and compare amongst groups. There are however several limitations to this method. It focuses only on the earnings of the individual, failing to account for life’s intangibles, the value an individual may experience from undertaking leisure activities, personal relationships and general wellbeing. It is also sensitive to income inequalities, valuing the VSL of certain high-earning groups higher than others.
A personal perspective - Contingent Valuation
Individuals are asked what dollar value they would be willing to pay for various levels of improvement to their risk of mortality, or how much they would need to be paid to accept an increased likelihood of death. From this, inference is made to the value placed on one's own life. This approach goes beyond the ‘low resolution’ Human Capital method to capture the intangible aspects of life, and is thus a more holistic estimate of the VSL. It is however liable to individuals placing unrealistically high values on their own lives, a so-called ‘protest-bid’, which can skew results. Additionally, difficulties with scope insensitivity, the ability to differentiate levels of risk in a meaningful and consistent manner, can result in unreliable individual responses.
Revealed preferences - Consumer Preference Method
Individual choices in a market economy can reveal the monetary value individuals are willing to place on changes to their own safety. If an individual is willing to pay a higher price for a safer product alternative and related reduction in mortality, we can infer the VSL. For instance, what price differential would an individual be willing to pay for a car with, or without, airbags? The main advantage of this method in comparison to the Contingent Valuation method is it relies on revealed rather than stated preferences, thus avoiding issues such as protest-bids. One's preferences in the market are not solely driven by the difference in risk associated with different product or service choices however. It is therefore important to consider how much safety factors into the individuals purchasing decision.
Differing values for differing populations
Depending on the method and population group being studied, there may be wide variation in the VSL calculated. In all three of the methodological approaches above, a relatively high-income earner in a high-income country will likely have a higher VSL than an individual struggling to find employment in a low-income country. From a purely economic perspective, we can see how the lower valuation of a particular life may lead one to make riskier decisions surrounding health and wellbeing, or give less incentive for governments or private entities to invest in the wellbeing and longevity of the lower-income individual. An excellent example of this disparity comes from a paper by León and Miguel, which looks at the revealed preference VSL between African and non-African travellers making decisions on the transport mode used to travel to the international airport in Freetown, Sierra Leone. travellers had to decide between 4 options, each varying in risk, convenience and cost, namely ferry, hovercraft, water taxi and helicopter. After surveying some 561 travellers on their revealed travel preferences (i.e. the choices they made in the real world), the VSL calculated for African travellers was US$577 000, compared with US$924 000 for non-Africans, an almost doubling of the dollar amount. Further, the sample of African travellers surveyed as part of the study had an average income almost 50-times that of the average African citizen, meaning we should consider this an extremely conservative estimate of the true difference in the VSL between the typical African citizen compared to non-African travellers. The authors show statistically that this difference is driven in large part by differences in income, and the more fatalistic beliefs (the belief that things in the world are determined by fate, rather than believing one has more agency over their future) held by African survey respondents.
What implications does this idea have for our society as a whole? It seems somewhat obvious that those living in low or middle-income countries have significantly less purchasing power in the world economy compared to their high-income neighbours. This revealed valuation provides evidence that individuals may place a lower economic value on their own lives. But is this really the correct way to think about such valuations? Should we perhaps instead adopt a relative measure, something like an individual's revealed preference VSL divided by the local GDP? If we take this approach, using IMF data and GDP per capita for the African continent for African travellers, and worldwide GDP per capita for all other travellers (no equivalent available data for non-African GDP per capita), we end up with the following calculations:
For African travellers: $577 000/$2 194 = 262.99
For non-African travellers: $924 000/$13 396 = 68.98
This shows African travellers value their life at a level approximately 263 times that of their annual average GDP, compared with non-African travellers who value it some 69 times as much. We do however need to be aware of the selection bias present in the original sample, that the African travellers sampled had incomes that differed significantly from the average found in the population. The quoted rate of the African traveller included in the study was approximately 50 times that of the average GDP per capita. If we apply this 50 times multiplier to our calculation, we get a very different result
For African travellers: ($577 000/50)/$2 194 = 5.26
For non-African travellers: $924 000/$13 396 = 68.98
Not only is the GDP and revealed preference VSL lower for African travellers, the VSL to GDP ratio is also lower. The selection-bias adjusted result suggests the non-African travellers have a VSL/GDP ratio some 13 times higher than African travellers.
The adjusted result suggests the non-African traveller economically values their lives some 13 times higher than African travellers, when corrected for GDP and adjusted for the selection bias present in the original study. Are fatalistic attitude doing the work here to explain the difference beyond the calculated values for GDP and VSL? They perhaps may be contributing somewhat. It may also be argued that the reason for the large difference is that these results reveal an internalisation of the very real differences in what a society is willing to spend to save any one individual's life. For instance, whilst there may be a certain VSL figure for an individual in a high-income country, it is also true that for instance in Australia, if one were to require an expensive, potentially life-saving but likely futile medical intervention, the economic cost would hold very little weight at the individual level. The main factors being weighed would be the wellbeing of the person and potential for quality-life gained, against the potential pain, harm, or loss of dignity that may result from such an intervention. In such a case, for the individual in this circumstance, the upper bound to the allocation of resources to extend their life is set by what science is able to do to extend or improve a life, rather than economic factors. The same cannot be said in low-income societies. Whilst life-saving interventions that are low-cost, highly-effective and available are theoretically obtainable, an individual's economic situation or the availability of healthcare services (such as diagnostics, drugs or interventions) provide an upper bound to what can be offered to these individuals. One may point to available universal health care as the factor doing the work in this scenario. If we consider emergency situations however, it is true that a life-saving intervention would be administered to an individual in most high-income societies regardless of insurance or relative financial status. It is possible that individuals living within low-income societies internalise this unspoken valuation that is placed on the willingness to spend to save their lives, and thereby make choices in the real world reflective of the fact that the value they place on their own life is less. This makes for a vicious circle of risky decision making, and makes it all the more difficult to change individual behaviours to look forward to the long-term.
Scale, tractability and neglectedness
Given this information, does it change how we should approach the gap that exist between the equal moral values of all human lives and the VSL across different parts of our global society? The scale of the issue is certainly large, potentially accounting for some fraction of total income inequality across the globe. There may be a significant aspect of neglectedness of focus on both fatalistic attitudes, and the impact of the self-valuation of a life on life quality and quantity. Certainly, it would be of great value to have a better idea of how these factors impact the lives of those living in low income communities around the globe. How tractable the use of this information would be in efforts to combat economic inequalities across the globe and improve the lives of those in poverty is questionable. Changing the perceptions and resultant behaviours of large numbers of people is notoriously difficult, so it is unclear how much impact could be gained from further insights into these specific causal mechanisms would impact the issue at scale.
Conclusion
A lower price on the VSL for individuals in developing nations may go some way to explaining the lack of investment in technologies to improve the lives of those living in these nations. Since individuals are implicitly willing to spend less in relative and absolute terms to preserve their own lives, there is less incentive to develop innovations that will do so. In order to work toward improving the health and wellbeing of those living in low-income societies, there may be value in further research into the utility of relative and absolute VSL estimates as a marker of progress, and tool for gaining a more nuanced insight into the factors underlying economic inequalities.
Interesting post! Thanks for sharing.
One way of looking at this is that they've internalised a lower valuation on saving lives (as you suggest). But might another way of looking at it be that they've internalised a higher valuation on improving quality of life?
i.e. if people from low-income societies are willing to spend proportionately less on life-saving interventions, that implies they are willing to spend proportionately more on life-improving interventions.
If so, are we sure that this needs changing?