Analysis of Economic Feasibility

The OSHA Act requires the Secretary of Labor "in promulgating standards dealing with toxic materials and harmful physical agents (such as ergonomic hazards)...[to] set the standard which most adequately assures, to the extent feasible, on the basis of the best available evidence, that no employee will suffer material impairment of health or functional capacity even if such employee has regular exposure to the hazard dealt with by such standard for the period of his working life" (Sec. 6(b)(5)). The courts have held that, to demonstrate that a standard is feasible, OSHA "must construct a reasonable estimate of compliance costs and demonstrate a reasonable likelihood that these costs will not threaten the existence or competitive structure of an industry, even if it does portend disaster for some marginal firms" (United Steelworkers of America, AFL-CIO-CLC v. Marshall, the "Lead" decision). In assessing the preliminary economic feasibility of the proposed ergonomics rule, OSHA has followed the decisions of the courts in the Lead case and other OSHA cases and has relied on the best available information and data to preliminarily determine that the standard is economically feasible for firms in all affected industries.

Analysis of Economic Feasibility

OSHA's estimates of the number of potentially affected establishments, employees and MSDs likely to be experienced by these employees are presented in the Industrial Profile (Chapter II) and Benefits (Chapter IV) chapters of this analysis. Other sources of information relied on are the comments of the Small Entity Representatives (SERs) who consulted to the Federal Panel convened in accordance with SBREFA, and the findings and recommendations of the panelists (Ex. 23).

This analysis has been conducted on an establishment basis: the cost of compliance, numbers of affected establishments, and the potential impacts of the standard on firms of all sizes are all estimated from establishment data. For each affected industry within general industry, estimates of per-establishment annualized compliance costs are compared with pre-establishment estimates of revenues from the U.S. Department of Commerce, Bureau of the Census (Census, 1996), and then with pre-establishment profit rates derived primarily from annual statement studies by Robert Morris Associates (RMA, 1996). The profit rate data, based on the income statements of individual firms, reflect normal accounting practices in computing profits. Based on the results of these comparisons, which identify the magnitude of the potential impacts of the proposed standard, OSHA then assesses the standard's economic feasibility for establishments in all affected industries.

Table VI-1 shows annualized compliance costs, revenues, and profits (both as a percentage of revenues and in dollars) for establishments in all affected industries, as well as compliance costs as a percentage of revenues and profits.

OSHA assumed that the establishments falling within the scope of the proposed standard had the same average sales and profits as other establishments in their industries. This assumption is reasonable because there is no evidence suggesting that the financial characteristics of those firms experiencing covered MSDs among their employees are different from firms that do not have covered MSDs. Absent such evidence, OSHA relied on the best available financial data (that from the Bureau of the Census and RMA), and based its analysis of the significance of the projected economic impacts and the feasibility of compliance on these data.

The cost of compliance estimates developed in Chapter V and shown in Table VI-1 were then compared with estimated sales and profit data for establishments in each application group to "screen" for potential impacts. If sizeable impacts are identified by such a screen, they could indicate industries vulnerable to firm closings, and such closings, in turn, could lead to industry restructuring of the type referred to by the court in the Lead decision.

The analysis of the potential impacts of the proposed standard on before-tax profits and sales shown in Table VI-1 is a screening analysis because it simply measures cost as a percentage of pre-tax profits and sales but does not predict impacts on these before-tax profits or sales. The screening analysis is used to determine whether the compliance costs potentially associated with the proposed standard could lead to significant impacts on affected establishments. The actual impact of the proposed standard on the profit and sales of establishments in a given industry will depend on the price elasticity of demand for the products or services of establishments in that industry.

Price elasticity refers to the relationship between the price charged for a product and demand for that product; that is, the more elastic the relationship, the less able an establishment is to pass the cost of compliance through to its customers in the form of a price increase and the more it will have to absorb the cost of compliance from its profits. When demand is inelastic, establishments can absorb all of the cost of compliance simply by raising the prices they charge for the product or service, leaving their profits untouched. On the other hand, when demand is elastic, establishments cannot absorb all the costs simply by passing on the cost increase; instead, they must absorb some of the increase from their profits. In reality, "when an industry is subjected to a higher cost, it does not simply swallow it; it raises its price and reduces its output, and in this way shifts a part of the cost to its consumers and a part to its suppliers," in the words of the Court in American Dental Association v. Secretary of Labor (ADA v. Secretary of Labor).

Specifically, if demand is completely inelastic (i.e., the price elasticity is 0), then the impact of compliance costs that amount to 1 percent of revenues would be a 1 percent increase in the price of the product, with no decline in demand or in profits. Such a situation is unlikely to occur, and is possible only when there are few, if any, substitutes for the product or services offered by the affected establishments and the products or services of the affected establishments account only for a small portion of the income of its consumers. This elasticity represents the worst possible impact on prices, and is represented by costs as a percentage of revenues. If demand is perfectly elastic (i.e., the price elasticity is infinitely large), then no increase in price is possible, and before-tax profits would be reduced by an amount equal to the cost of compliance (minus any direct cost savings resulting from improved worker health and reduced insurance costs). This is the worst case impact on profits. Under this scenario, if the costs of compliance represent a large percentage of the establishment's profits, some establishments might be forced to close. Perfect elasticity is highly unlikely to occur, however, because it can only arise when there are other goods or services that are, in the eyes of consumers, perfect substitutes for the goods the affected establishments produce.

A common textbook example of the intermediate case between infinite and zero price elasticity would be a price elasticity of one. In this situation, if the cost of compliance amounts to 1 percent of revenues, production would decline by 1 percent and prices would rise by 1 percent. With a price elasticity of one, an increase in costs of one percent may lead to a decline in profits of one percent. Consumers would effectively absorb most of the costs through a combination of increased prices and reduced consumption; this, as the court described in ADA v. Secretary of Labor, is the more typical case.

As Table VI-1 shows, the potential impacts of the proposed standard on average industry revenues are small even under the worst-case scenario of full cost passthrough. For all industries taken together, annualized compliance costs are 0.03 percent of revenues. In no industry group do compliance costs exceed 1 percent of revenues.

Table VI-1 also shows that the potential impacts of the proposed standard on average industry profits are small, even under the worst-case scenario of no cost passthrough. For all industries as a whole, annualized compliance costs are 0.6 percent of profits. Compliance costs potentially exceed 5 percent of profits only for 10 industry groups, and they exceed 10 percent of profits only in one industry (SIC 561, men's and boy's clothing stores). This potential impact is accounted for in this industry by the fact that, as reported by Robert Morris Associates (RMA), this industry's profits are extremely small -- 0.1 percent of sales (compared with an average profit of 4.89 percent for all industries).

A profit decline of 10 percent, the most serious impact projected under the no cost pass- through worst-case scenario, would mean that a firm with $10,000 in profits would now have $9,000 in profits. A profit decline of this magnitude would have little effect on most firms and would be, for example, much less of a decline in profits than a firm would expect to experience in a recession year. Normal year-to-year and within industry variation of profits are greater than 10 percent of total profits. Specifically in the case of establishments in SIC 561, a 10 percent decline in profits would mean that that industry's current average profit of $721 would be reduced to $613. To completely offset this profit decline, establishments in SIC 561 would need only to increase prices by 0.01 percent, even under the worst case scenario. In reality, as the Court pointed out in ADA vs. Secretary of Labor, firms in this industry would likely increase prices by some amount and reduce profits by some amount.

Based on the data for establishments in all industries shown in Table VI-1, OSHA preliminarily concludes that the proposed ergonomics program standard is economically feasible for the industries covered by the standard. OSHA reaches this conclusion based on the fact that, even under the worst case scenarios of full cost passthrough and no cost passthrough, respectively, impacts on average industry revenues are only 0.03 percent, and impacts on average profits are only 0.6 percent. In only one industry, SIC 561, do worst-case profit impacts exceed 10 percent and, as discussed above, this industry's profits are abnormally low (only 0.1 percent of sales). The average annual profit per establishment for establishments in SIC 561 is $721, by far the lowest profit for any of the 343 industries shown in Table VI-1. (OSHA believes that the profits reported by RMA for establishments in this industry may be anomalies.)

However, because Table VI-1 also shows that the proposed rule's worst-case impacts are potentially concentrated in a few industries, OSHA analyzed the proposed standard's potential impacts on establishments in these industries, termed "affected industry establishments" in this analysis. Affected establishments are those without an ergonomics program and whose employees are projected to incur a covered MSD in the next 10 years. OSHA's analysis of affected establishments thus looks at the potential for adverse impacts on those firms likely to experience the greatest impacts under the two worst-case scenarios described above.

The results of this analysis are shown in Table VI-2, which shows:

• Data on all affected establishments, including total annualized compliance costs, the number of establishments potentially affected over 10 years, and average profits;

• Average data per affected establishment, including average costs of compliance per affected establishment, average revenues, and average profits; and

• Annualized compliance costs as a percentage of revenues and of profits.

Although Table VI-2 projects, as would be expected, potentially greater impacts on the profits and revenues of affected establishments than was the case for the establishments represented on Table VI-1, the proposed standard's worst-case impacts overall are only 0.1 percent of revenues and 4.1 percent of profits. Table VI-2 shows that impacts do not exceed 1 percent of revenues in any affected industry, even using worst-case assumptions.

However, under the worst-case no cost passthrough scenario, Table VI-2 projects profit impacts exceeding 20 percent in only three industry groups: SIC 138 (oil and gas field services), SIC 561 (men's and boy's clothing stores), and SIC 833 (job training and related services). In these industries, projected worst-case profit impacts were 22.8 percent (SIC 138), 61.9 percent (SIC 561), and 20.3 percent (SIC 833). As discussed above, SIC 561's annual profit of $721 is lower by a factor of 5 than the profit for any other industry shown on Table VI-2, and establishments in SICs 138 and 833 have average profits of only 2.0 percent and 2.5 percent, respectively, approximately half of the average profit rate for firms in all industries.

It is also worth noting that the projected impact of the proposed standard on the revenues of the establishments in these three potentially most severely impacted industries is only 0.45 percent (SIC 138), 0.06 percent (SIC 561), and 0.5 percent (SIC 833). Since impacts on profits are not the most reliable indicator of economic impact (because firm profits vary substantially from year to year, especially over different phases of the business cycle), these modest impacts on the revenues of affected establishments are reassuring.

Nevertheless, OSHA analyzed the impacts of the proposed standard on these three industries more extensively to determine what factors might account for these potential worst-case effects on profits. As discussed above, establishments in SIC 561, men's and boy's clothing, have profits that are lower, by a factor of 5, than those for any other industry shown on Table VI-2. In an industry such as this, even the very small average annual cost of the ergonomics standard -- $404 -- represents a large share of annual profits ($721). Establishments in this industry are already experiencing serious problems, but the compliance costs of the standard are not the source of these problems.

In the oil and gas field services (SIC 138) and job training (SIC 833) industries, establishments are likely to be able to raise their prices without losing business, because both of these services serve local markets and occupy a specialized niche. For job training establishments, a price increase of only 0.5 percent would totally restore profits, even under this worst-case scenario. For oil and gas field services establishments, the story is the same: a price increase of 0.45 percent would totally restore profits. Even if establishments in these industries were completely unable to pass any costs through, a highly untypical case, as the Court stated in ADA v. Secretary of Labor, the profit rates of these industries would only decline to just above 2.25 percent from 2.5 percent (SIC 833) and 1.8 percent from 2.0 percent (SIC 138).

Thus, OSHA preliminarily finds, even for the potentially most impacted industries, and even assuming absolutely no cost passthrough, that the viability of affected firms will not be adversely impacted. The proposed standard is therefore economically feasible for all affected industries. OSHA has shown that, in the words of the Lead decision, the costs of compliance associated with the standard "will not threaten the existence or competitive structure" of any affected industry.

Bureau of the Census [DOC,1996]. U.S. Department of Commerce, CD-ROM issued November 1996. Ex. 28-6

Robert Morris Associates [RMA, 1996]. Annual Statement Studies 1996. Robert Morris Associates. Philadelphia, PA 1996.

Small Business Regulatory Enforcement Fairness Act (SBREFA) Panel Report [April 1999].

Small Business Advocacy Review Panel on the Occupational Safety and Health

Administration's Draft Proposed Ergonomics Program Rule. Ex. 23