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Economic Justification for Worksite Smoking Policies by Robert D. Tollison and Richard E. Wagner 1 L We are Dr. Robert D. Tollison and Dr. Richard E. Wagner of George Mason University in Fai::fax, Virginia. Dr. Tollison is presently Director of the Center for Study of Public Choice and Duncan Black ]?rofessor of Economics at George Mason University. Dr. Tollisoil received his doctoral degree in economics in 1969 froin the University of Virginia. Since that time, he has taugh-: at Cornell University, Texas A&M University, Virginia Tech, Clemson University, and now at George Mason Univiarsity. He has also served as a'Senior Staff Economist on the President's Council of Economic Advisers and as Director of -:he Bureau of Economics at the Federal Trade Commission. Dr. Tollison is the author of numerous scholarly books a>>d articles, and is the past president of the Southern Economic Association. Dr. Wagner is presently Chairm,in of the Department of Economics and Harris Professor of Economics at George Mason University. Dr. Wagner completed his Ph.D. in economics at the University of Virginia in 1966. Since that time, he has taught at the University of California ar. Irvine, Tulane University, Virginia Tech, Auburn Univer3ity, Florida State University, and now at George Mason University. Dr. Wagner also spent a year as a resident scholar at the Urban 1

Institute. He has published widely in economics, including two textbooks on public finance, numerou;3 scholarly papers, L L'i r i and a treatise on democracy with James M. Buchanan, 1986 recipient of the Nobel Prize in Economic;3. We have been asked to comment upon Chapter Ten and Chapter Ten's Appendix of a document entitled "Environmental Tobacco Smoke: A Compendium of Technica:L Information." Chapter Ten's Appendix, "Economic Justification for No Smoking Policies at the Worksite," by Ruth Behreas claims that smokers are particularly costly employee;3, as they raise costs to American businesses as much as $100 bLllion per year. The implication of this claim is that stringent anti-smoking policies in workplaces are good for busiaess and the American economy. However, we find the arguments in support of the author's thesis to be utterly without merit. At best, those arguments can be said to confuse accountLng for economics, in that the accounting-based claims the aut:zor makes about costs are misrepresented as being costs to busLness when, as a modicum of economic understanding would 3how, they are really costs to smoking workers. But it is also questionable how accurate those claims of cost are, even when considered from an accounting point of view. Th& author presents a number oE estimates on the alleged added cost of smokers to American business. For 2

instance, studies by Luce and Schweitzer (1978), the Office of Technology Assessment (1985), and Rice et al. (1978), all provide cost estimates per year of between $52.8 billion and $62.2 billion in 1984 dollars. These studies isolate three main categories of cost (p. 174): (1) lost earnings due to early death, which accounts for about 40 percent of the estimated totals; (2) medical and hospital expenses attributed to smokers in excess of what is attributed to nonsmokers, which also accounts for about 40 percent of the estimated totals; and (3) lost earnings attributed to smoking-related ill- nesses, which accounts for about 20 percent of the estimated totals. I [ In addition, the author cites a study by Kristein (1983) that estimates the added cost to business to be in the range of $336 to $601 per smoker per year, as well as one by Weis (1981) that estimates that added cost to be around ten times higher, in the vicinity of $4,500. Many of the cost categories discussed in these latter two studies duplicate one of the three noted above, but a few of them do not, or at least do not appear obviously to be duplications. For instance, the claim in Weis and in Kristein that smokers increase the costs of life and disability insurance for businesses is related to category #1 abcve; the claim that 3

--smokers-increase health insurance-costs is related to category #2; and the claim that smokers increase costs through increased absenteeism is related to category #3. What remains are a few miscellaneous categories in which it is alleged that smokers increase costs to business: (a) a claim that smokers are responsible for increased property damage and lead to increased costs for fire, liability, and accident insurance; (b) a claim that smokers increase costs for ventilation and air-conditioning, and (c) a claim that smokers increase costs through the time they spend smoking on the job. A consideration of these various alleged cost elements shows that there are six separable cost categories concerning the alleged higher cost of smoking: (1) life. insurance costs, (2) health insurance costs, (3) missed work through absenteeism, (4) missed work through smoking breaks, (5) property damage, and (6) costs for ventilation and air-conditioning. We shall examine each of these categories in turn, explaining why none of them create any legitimate issues of public policy, as well as showing why several of them are dubious even as accounting propositions. 1. Life insurance costs. Life insurance companies charge lower premiums to nonsmokers than to smokers for the same type of coverage. But nonsmokers are not harmed by the purchase of life insurance by smokers, for each pays an actuarially fair price for the relevant risk category. By the 4

same token, the lifetime earning losses noted by Behrens (p. 174) are lost by smokers and do not represent losses to nonsmokers. What about employers who provide life insurance to their employees? An employer with a greater proportion of smokers would seem to incur a higher cosi; in doing so than an employer with fewer smokers--at least if the insurance were i i I i I provided free of direct charge to the employees. This would be so in the situation described, but it should be noted in this case that it is the employer (i.e., the owner or owners of the firm, really) who is bearing this higher cost and not the nonsmoking workers. But_this is a cost the employer could avoid by passing on the extra cost of coverage fo)- smokers to smokers. There is no reason why smokers and nonsmokers have to be offered the same terms under group life ansurance. If an insurance company charges a company higher premiums for smokers, then the company may choose to ]?ass on the additional costs to smokers just as they can charge more for medical insurance for people who elect to have maternity coverage than for those who do not. 2. Health insurance costs. The claim that smokers are higher cost employees for purposes o.` health insurance is 00 C7) related to the claim that their annual medical expenses are ~ .~ more than $20 billion per year beyond wh,at they would be if N UT 5

they were nonsmokers. This claim is problematical on both accounting and economic grounds. On accounting grounds, those who make the claim that smoking employees have higher health insurance costs base their assertion on adding up cases where smokers supposedly have higher medical expenses than nonsmokers, and attributing the difference to smoking. But there are also cases where smokers have lower medical expenses, and these could likewise be attributed to smoking. For instance, Parkinson's disease is apparently rare among smokers, and it would be possible to impute a cost saving to smoking in this ::espect, due to the lower incidence of Parkinson's disease among smokers. Larger in magnitude but similar in spirit, smokers have a lower incidence of various geriatrical-related illnesses and diseases, and this cost saving could likewise be attributed to smoking. The result of a more complete accounting is unknown, but at the very least it would reduce the accounting cost attributed to smoking, and could even eliminate it. Economically, the situation is much the ;same as with employer-provided life insurance. If a company makes health insurance available on equal terms to bo:h smoking and nonsmoking workers, and if smokers are more costly to serve, it is the employers-owners who lose. Ani9 they could seek to pass on some of that added cost to smoki:lg employees, by 6

charging them for the added cost of their_premiums. But, as with life insurance, this is essentially a matter of compensation policy within companies, an3 not a matter of public policy. 3. Missed work due to absenteeism. One aspect of the claim that smokers have poorer health than nonsmokers is the claim that they miss work more often than nonsmokers. Some data allege that smokers on average miss about 2.2 days more work per year than nonsmokers. Based on this assumption, it might appear that smokers are more costly workers than nonsmokers. But the same type of data also show that pipe and cigar smokers miss less work than nonsmokers. Consistency would seem to require the conclusion that productivity might be enhanced by getting people to start s:.noking pipes and cigars! Another possible conclusion is that these accounting data are misleading, if not wrong. Smokers are relatively heavily concentrated in blue collar occupations with hourly pay and compensated sick leave. Smokers are less represented in white collar occupations with salary and without formal sick leave provisions--and which are generally occupations with a greater degree of on-the-job fun and recreation. There is no evidence that supports claims that, allowing for type of occupation and form of compensation, smokers miss work more often than nonsmokers. In fact, there is some evidence that 7

I r when such factors are taken into_account, smoking per se has no impact on worker absenteeism (Ault, Ekelund, Jackson, Saba, and Saurman 1988). To be sure, should smokers mis;a more work than non- smokers, this would show smokers to be hLgher cost employees than nonsmokers. But who bears this cos-=? We would.generally expect such higher cost workers to earn :Less, as, for example, in being promoted less quickly than lowe:: cost employees. In any event, smokers who might have relatively high rates of absenteeism would be a burden to their employers only to the extent the employers agreed to accept that burden--which is to say, only to the extent they decided to act charitably. 4. Missed work due to smoking breaks. This category is analytically identical to the preceding one. The accounting exercise is quite simple. Suppose smokers take four smoking breaks per day, of 15 minutes each. If the standard working day were eight hours, smokers would be viewed as working only seven hours. This would make smokers 12 percent more costly than nonsmokers--assuming that this was the only difference between smokers and nonsmokers. While this assumption informs ;;uch accounting efforts, it is surely without foundation. This assumption would have us believe that smokers and nonsmokers work equally diligently for seven hours per day, and =hat nonsmokers continue in the same manner for the eigh-:h hour while smokers 8

sit back and smoke for that eighth hour. Yet experience in any business establishment will show all kinds of ways that nonsmokers can also take what might be called on-the-job leisure: drinking coffee, making shopping lists on a computer, talking about sports with a co:lleague, and L daydreaming while appearing to be thinking, are a few of many possible illustrations. Smoking is simp:ly more visible and explicit, particularly in workplaces tha: allow smoking only in particular areas and times. But it is far, far from the only source of on-the-job leisure in workplaces throughout the land. 5. Property damage. It is claimed that smokers damage property in such forms as burned carpets and higher costs for cleaning draperies. This accounting fiction is based on a presumption that nonsmokers do not do such things. But it is totally illegitimate to add up such smoking-att'ributable costs as cigarette burns and call this an excess cost of having smoking workers, wathout also trying to consider the costs that nonsmoking worke::s might incur. Many nonsmokers drink coffee o:: soft drinks, and which on occasion are spilled--sometimes even onto, or into, such expensive office equipment as compul:ers and copying machines. Another nonsmoking employee may have failed to place a ladder securely in its position In a store room, with the result being that vibrations from a nearby fork lift L

r t I caused the ladder to fall and crash into some chemicals stored on a shelf, that in turn fell and broke open. This in turn shorted out the electrical system in the building, causing the loss of much computer work. Employers, of course, have incentives to mitigate accidental damage to property, whether by smokers or nonsmokers. But the kinds of accounting statistics reported by EPA give no basis for concluding that smokers are a source of excess property damage. And in any event, the issues created are ones of individual business policy and not of public policy. 6. Ventilation and air-conditioning costs. The claim that smokers increase costs of vent:ilation and air-conditioning is the same kind of claim as the preceding one that smokers are sources of property damage. Indeed, in many cases there may be no added ventilat:ion cost that can be reasonably attributed to smoking. To be sure, the inadequacy of ventilation in modern buildings is coming increasingly to be recognized. But in a great many case~s, and probably in most, there is no assignable cost of vent:ilation for particular items. To illustrate, suppose the only two things to be removed from the air are cigarette smoke and formaldehyde. It is doubtful rf a less expensive ventilati.on system would be installed if there were no cigarette smoke to remove. And 10