he takes his risk premium in stock options

I just listened to the most recent episode of Planet Money, which if you don’t listen to you should and if you haven’t listened to the most recent episode do so immediately. The episode is about the economics of illegal drugs and is oriented around an interview with “Freeway” Rick Ross, a former crack kingpin of Los Angeles, and is fascinating throughout.

The broad conclusion you can draw from the episode is that the distinction between “law as enactment of public policy” and “law as statement of fundamental moral principles” is blurry and often tough to sort out. But there was also an interesting economic moral to be drawn as well; there’s no transcript up yet, but basically Ross disputes a widely-held theory in academic literature that there is a risk premium in the wages of dangerous jobs. Ross cites the desperation and despair of poverty as why himself and others were willing to engage in work that could risk prison or death for relatively little in compensation (although Ross himself was well-compensated).

I think what this really challenges is that there’s lots of assumptions based into the cake of economic theory that, when you remove those assumptions, makes the “free market” look a lot less hospitable. It’s a lot nicer to think that miners will be paid generously for risking their lives in a dark, dreary shaft, but that assumes a diverse and open employment market operating at full employment, in which plenty of non-dangerous work is available and so people have a clear choice in taking the risk premium along with the risk. In real life, though, sometimes the choice given to you is miner or unemployed, which could mean “my family doesn’t eat,” which is rarely a choice at all. Especially during a recession, anyone offering a job is offering a product for which demand far exceeds supply, and thus can negotiate the price of the job – ie, how little someone will do it for – from a strong position no matter how dangerous or distasteful the work is.