the economics of fringe benefits

B E V A R S M A B R Y O

The Economics of Fringe Benefits

RICHARD LESTER HAS WRITTEN that no theory exists “to give an ade- quate explanation of the great changes that have occurred in the wage-benefit mix in the American economy during the past two decades or to provide an objective basis for predictions regarding future developments in the wage-benefit mix and the distribution of compensation among different types of benefits.”l

The rapid growth of fringe benefits during the last two decades has been well documented. Nevertheless, as the distinction between working conditions and fringe benefits is not always clear, even recent data such as those by Baumin2 may under- estimate the growth of supplemental payments. Ordinarily, fringe benefits are regarded as direct or indirect income supplements which are to be received, usually on a contingency basis, at some time in the future. Paid holidays, vacations, and sick leave maintain a worker’s income for intervals during which, if he chooses not to work, he otherwise loses income, and health insurance shifts to an employer an expense which the worker otherwise would have to bear. Yet, the subsidization of a plant cafeteria or the provision of work uniforms also shifts to the employer a cost ordinarily assumed by the worker. Similarly, if air-conditioned work sites or piped-in music reduce absenteeism by making work more pleasant, workers’ in- comes are correspondingly maintained. Insofar as the employer is concerned, both kinds of expenditures represent a cost attributed to labor.

Fringe benefits, in the broad sense, are regarded differently by various parties to the extent that each is affected differently. The impact of fringe benefits on the

* Professor of Economics, Bowling Green State University. 1 Richard A. Lester, “Benefits as a Preferred Form of Compensation,” Southern Economic

2 Alvin Baumin, “Measuring Employee Compensation in U.S. Industry,” Monthly Labor Re- Jourml, XXXIII (April, 1967), 495.

uiew, XCIII (October, 1970), 17-24. The division among employee compensation was as follows: Pay for working time $3.22

Straight-time pay 3.13

Other benefits .67 .2 1

Retirement 2 4 Health and insurance .15 Unemployment benefits .04 Bonuses and savings plans .03

- Premium pay .09

Leave time (except sick) ~

95

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employer, the union and its members, and potential applicants to the firm will be analyzed in the following sections. Later, the attitudes of these parties will be in- corporated into a generalized theory of fringe benefits, and hypotheses suggested by this analysis will be indicated.

The Employer and Fringe Benefits The employer’s labor policy may be viewed as one in which he

seeks to recruit and maintain a productive labor force at minimum expense. To the extent that fringe benefits promote this policy, they can be an effective instrument. Becker has suggested that employers who invest significant sums in the speci6c training of their employees find it to their advantage to pay part of their enhanced productivity in the form of deferred compensation so that benefits increase with longevity and thus discourage turnover among these worker^.^ Reduction of turnover not only permits the employer to recoup the training outlays on these employees, but also decreases the amount of labor which must undergo training. Fur- ther, by reducing the use of inexperienced workers, savings also accrue from reduced spoilage, less supervision, less distraction of fellow workers, etc.

Fringe benefits that involve pay for time not worked require supplemental labor to meet contingencies in which the labor force drops below the desired norm. Firms may provide for this by employing labor in excess of normal operating requirements, so that there often will exist slack in the utilization of labor, or they may make up for labor deficiencies by utilizing a smaller labor force on an overtime basis. Since fringe benefits inflate labor costs, it may be cheaper to meet inter- mittent labor deficiencies through the occasional use of overtime than through the employment of excess labor. Supplemental benefits, not being a part of the basic wage, do not enter into overtime or premium pay calculations, nor need social security taxes be computed on them. (A further marginal saving is, of course, incurred through the use of overtime if average labor costs must increase, either through the payment of higher wages or greater fringe benefits, in order to attract the extra labor.) Hence, an effect of fringe benefits as an increasing proportion of labor costs is to generate a greater reliance on the use of overtime to meet tempo- rary labor shortages4

3 Gary S . Becker, Human Capital (New York: Columbia University Press, 1W), pp. 8-29. Compensation would be higher than in alternative employments using only the general compo- nent of their acquired skills, so that the economic incentive to change employers is reduced. The sum of supplemental forms of compensation and the wage rate is still less than the worker’s em- nomic contribution to the firm by at least the compounded cost of specific benefits.

4 The extent of savings that can be realized from fringe benefits which reduce labor turnover and generate greater reliance on overtime can be seen from the followin formulation. Let N = total amount of required labor in manhours; L = regular employment of P abor in manhours; q = overtime use of labor in manhours; where L1 + ql = Ni; No = L,, = NI. Let V,, = the quit rate with a level of fringe benefits of F,, and Vi = the quit rate with FI level of fringe benefits. The wage rate is w, the overtime premium is a, and training costs = t. An increment in fringe benefits and reliance on overtime to supply part of the labor supply is worthwhile if

By appropriate substitutions and collection of terms, this formulation can be reduced to the following inequality: AFN, I t(V1LI - L,AV) + (Fi - aw)ql. It pays to increase fringe benefits as long as the increment paid to the original labor force is less than the sum of the training costs of the new labor force and the savings in the training cost of the original labor force (since AV is negative), plus the savings incurred from using overtime. The latter is equal to the amount of overtime utilized multiplied by the difference between the new fringe level and the penalty payment per manhour of overtime.

(w + V I + tV& + (1 +a)wqt I (w + F, + tV.N

The Economics of Fringe Benefits / 97 Fringe benefits can also serve as a strategic variable in collective bargaining

with the union. In times of relative economic stability, firms may be able to grant supplementary benefits without disturbing existing wage patterns or establishing new ones in an industry, yet they appear to satisfy the incessant cravings of unions and their members for “more.” In fact, by building into a supplementary benefit program multiple constraints limiting the firm’s liability, with some more binding than others, a relaxation of one of the less restrictive constraints may appear to be a concession and the firm may create the impression that it is giving mork than actually is involved. For example, supplemental unemployment benefits in the automobile industry were originally to be financed by a contribution of five cents per work-hour to a reserve fund. However, such contributions were to cease when the fund reached a specified sum, determined by formula, and over many of the early years of the program, firms were able to pay less than five cents per hour. Similarly, pension contributions were tied in originally with social security payments. The employer limited his commitment to a pension of, say, $100 per month per worker. If social security payments advanced, the employer’s liability was correspondingly r e d ~ c e d . ~

Nevertheless, there are some disadvantages to the employer in paying fringe benefits instead of wages. Administrative costs are likely to be much higher. More- over, in the recruitment of labor, fringe benefits are likely to be less visible than wage rates, and less labor may be attracted than if remuneration were weighted more in terms of wages. As a result, the benefit package can influence the range of choices available to the employer in the selection procedure. Moreover, work schedules are disrupted when workers utilize their sick leave benefits. The employer must weigh these advantages and disadvantages in arriving at the optimum benefit package. An analysis of this process is given later.

Unions, Employees, and Fringe Benefits In a labor market where the ordinary worker has imperfect knowl-

edge about (1) remuneration practices in different firms, (2) the ability and relative willingness of employers to offer different types of benefits, and (3) the tax impli- cations or the external economies associated with digerent kinds of benefit programs, the union can serve as an information source to its members. As a source of information, the creditability of union leaders will depend on their historic success in improving membership welfare. Union leaders, of course, are aware that fringe benefits are often substitutes for wage increases, and that members must be edu- cated to the belief that more real income can sometimes be secured through supplemental benefits than through wage

6 Early in 1971 the Internal Revenue Service disapproved the implementation of this practice and announced that the tax-exempt status of firms incurring expenses under such a pension program would be revoked if pension benefit contributions of employers were henceforth reduced. Until this time, however, employers could appear to be yielding more in pension benefits than they actually intended.

8 Because of the progressive income tax, negotiated increments in the form of nonwage, deferred benefits can result in greater real income than if the increments were in the form of money wages of equal value. Because of external economies, group life and health insurance can be pur- chased at lower premiums. Workers can be reminded that they sometimes squander their wages on impulse in neglect of their long-run interests (is., wages spent at the bar or on pinball machines). Their savings for contingencies as a result bear the brunt of this impulse spending. How much better it would be, the argument goes, for the worker and his family if part of his extra income were deducted from his paycheck, painlessly and automatically.

98 / BEVARS MABRY

The argument that incremental fringe benefits may increase long-run welfare more than incremental wages is likely to carry more weight in periods of relative price stability in which real wages do not tend to decline. Hence, Lester’s findings that automobile workers in 1952, 1959, 1962, 1964, and 1965 showed preferences for benefits rather than wage increases is not surprising in view of the relative price stability of these periods.? To the extent that negotiated gains included modest wage increases plus these benefits, the workers experienced a rise in real wages. Further, to the extent that supplemental benefits substituted for contingency savings, disposable personal income available for immediate consumption purposes was correspondingly enhanced, and spending could be greater for every level of take-home income. Yet, in periods of substantial price increases, such as the 1967- 1971 period, worker preferences can be expected to lean strongly towards wage increases. Union leaders must acknowledge these demands by incorporating them into their bargaining package, because workers’ dissatisfaction can represent a threat to their and/or to the organization’s survival. Members can change leadership through internal elections and can change bargaining representatives through decertification elections.

Ordinarily, union leadership can be expected to favor supplemental benefits. The administration of such programs requires a bureaucracy which tends to strengthen the rationale of union existence, membership dependency, and, hence, organizational survival. Fringe benefits are much less visible than wages, and this obtuse- ness can benefit the union. An increase in wages which, because of an elastic labor supply, brings forth a large number of job applicants can undermine the power of the union. If the union is unable to control admission to membership as a condition of employment or cannot otherwise erect barriers to employment, a labor supply which exceeds demand may permit the employer to choose selectively his labor force, where one of the criteria for selection is the applicant’s negative attitude towards union membership.s If labor supply responds more quickly to visible wage differentials, fringe benefits may reward union membership while offering current employees some job protection from potentially competitive nonunion labor. Simi- larly, national unions with membership located in establishments of unequal ability to pay may be unable to achieve a standard benefit package for all. However, it is much easier to achieve a more uniform wage among firms subject to the union’s influence if differential abilities to pay are exploited in the form of supplemental benefit packages. The more uniform wage pattern can lessen intra-institutional rivalry, while at the same time the monopoly power of the union can be used to benefit its more favorably placed members through differential fringe increments.9

7 Lester, op. cit., pp. 485495. The average annual consumer price increase for city workers between 1951 and 1953 and between 1958 and 1965 was less than 1.5 per ccnt. Excluding payments for time not worked and premium pay, the period 1957-1965 experienced the greatest gain in fringe benefits. From 1950 through 1956, fringe benefits rose from 5 per cent to 6.3 per cent of total employee compensation, an increase of 26 per cent. Prom 1957 to 1964, supplem- a t s increased from 6.3 to 8.8 per cent of total compensation, an increase of almost 40 per cent. National Income and Product Accounts of the United States 1929-65, Statistical Tables, US. Department of Commerce, Office of Business Economics, August 1966, Table 1.10.

8 Although the employer may be committing an unfair labor ractice in hiring on the basis ot anti-union sentiments, it may be difficult to prove such a charge i f the employer favors applicants, say, with rural backgrounds where anti-union attitudes may be more prevalent.

9 In this sense unions are not unlike firms who, at certain times, find it to their advantage not to disturb existing wage patterns but to satisfy their constituents’ cravings for “more” by granting supplemental benefits.

The Economics of Fringe Benefits / 99

Also, even when the power of the union is weak, its leaders can save face with their membership and with the community of organized labor by cooperating with employers in deceiving employees by obtaining imaginary fringe concessions.

The External Labor Force and Fringe Benefits To members of the labor force who are not employees of a given

firm, their supply response to the benefit package offered by the firm depends on their awareness of its value. This awareness is reflected in the expected value of the compensation package, E(C), which is composed of the expected value of the wage, E(w), and the expected value of the fringe benefits, E(F), where

(1) Normally, we may expect the ratios E(w)/w and E(F)/F to be less than one, and

E(C) = E(w) + E(F)

(2) E(w)/w > E(F)/F

The expected value of the wage can be defined as the probability of earning that wage multiplied by the wage, and the expected value of fringe benefits can be similarly defined. Under this definition, equation (2) implies that the probability of earning that wage exceeds the probability of receiving that fringe package. The argument that the wage probability is less than one is based on the assumption of imperfections in worker knowledge of job opportunities and in the knowledge of his own qualifications for positions at given wages, and the cost of job search (which reduces the net value of a wage).1° Since wage knowledge is presumed to be more generally available than fringe benefit data, the chances of a response error are less for the former than for the latter. Even among employed workers subject to a given compensation package, the present value of each type of benefit differs among workers. Eligibility for and the magnitude of the benefit are generally associated with length of job tenure (seniority). Therefore, the present value of vacation benefits, pension programs, and health plans tend to increase with age and seniority. Moreover, the present value of these benefits is also related to the probability of receiving them, which too is positively related to tenure. Conse- quently, an applicant for a position offering a package of benefits must make an estimate of their value based on his initial and later eligibility for them were he to secure the position, and he must also apply to this estimate a probability factor that he will continue his employment until he acquires these different degrees of eligibility (i.e., what is the probability of remaining in the employ of the company for 1, 5, 15, or 30 years?). In view of the complex features of many benefit programs which inhibit comprehension of their terms, it would not be surprising if applicants applied a lower probability estimate to the present value of such programs than to wages. This implies that firms may face a more elastic labor supply function the more heavily weighted is their compensation package in terms of wages.

The expected value of wages and benefits of a given firm should be higher for its employees than the expected value which they attach to a package of equal real value offered in other firms. In fact, the expected value of their existing com-

10 If the probability is one that an applicant seeking a job at a given wage will obtain the position, assuming perfect knowledge of other labor market conditions, then E(w) = w - S, where S is the expenditure incurred in that single search.

100 / BEVARS MABRY

pensation package may be higher than that attached to other firms even when the actual value of these external packages exceeds their own, simply because they are better informed of the package received in their present employment. This may explain why differentials do not always attract and allocate labor optimally.

Derivation of Average Labor Costs Consider a firm whose objective is, by varying the composition of

the wage-fringe benefit package, to obtain and keep a labor force at minimum average cost for each quantity of labor utilized, The firm employs a labor force with preferences for wages and fringe benefits such that the two are substitutes.'l If working conditions are included in the concept of fringe benefits, it is obvious that rather large wage increments will be necessary to compensate for small reductions in benefits, when such benefits are minimal, in order to maintain a given quantity of labor, Similarly, large increments in supplemental benefits are necessary to offset reductions in wages, as wage rates approach a relatively low level. Hence, the labor isoquant curves will be convex from below. Furthermore, given the level of benefits, higher wages maintain a larger labor force, and given the level of wages, greater fringe benefits maintain a larger labor force. The map of isoquant curves will be different as labor market conditions change-that is, under union or nonunion conditions, with inflation or price stability, or with full employment or unemployment.

Next, consider a family of isocost curves, here taken as straight lines, where higher curves represent greater expenditures on wages and fringe benefits (includ- ing working conditions).12 Each isocost curve intersects a number of labor isoquant curves, which means that total expenditure on the wage-fringe package represented at each point of intersection will purchase and maintain the quantity of labor represented by the corresponding intersecting isoquant curve. Similarly, each isoquant curve intersects a number of isocost curves. I t follows that, for any given quantity of labor, the optimum distribution of wages and fringe benefits at minimum cost is found where the isoquant curve is just tangent to an isocost curve. The locus which connects all such points of tangency, therefore, is a minimum total labor cost curve for all quantities of labor and represents optimum expenditures on wages and benefits for all such quantities. Dividing any quantity of labor into the corresponding cost associated with this optimum wage-benefit path gen- erates the appropriate average labor cost for that quantity. This process is illus- trated in Figure 1.

In a nonunion labor market, each isoquant curve lies to the left of a curve repre- senting the same quantity of labor in a unionized market-that is, the isoquant map shifts to the right with unionization. As a result, the optimum point on each isoquant curve can be expected to involve a higher cost for each quantity of labor and, in view of the argued union preference for fringe benefits, to imply a lower wage-benefit ratio. Hence a twist as well as shift in the isoquant map is implied

11 The labor uantities represented by isoquant curves are distinct from those offered in the

ReThe slope of tfese straight lines need not equal (- 1) if fringe benefits require greater ad-

labor market in t x at (1) they are stable, and (2) they are more informed about the value of the cam nsationpacka e.

ministrative costs than do wages.


with unionization. The total labor cost curve for the unionized market lies above that for the nonunion market, and average labor costs consequently are higher.

The Union Wage-Fringe Benefit Preference Path Figure 1 can be adapted to reveal the wage-benefit package pre-

ferred by the union and its members. Instead of a map of labor isoquant curves, where each curve represents a different amount of labor, a map of indifference curves can be substituted, where each curve represents a given level of preference

FIGURE 1

$ WAGES

0

$ TOTAL WAGES

AND BENEFITS

102 / BEVARS MABRY

for a continuum of wage-benefit combinations. A separate map exists for each specsed quantity of labor, although it is here assumed that the employed membership of the union is fixed and given at the moment of bargaining. The utility function of the union is regarded as dependent on wages, benefits, and the number of employed members. By holding the employed labor force constant, the union preference map is generated for wages and benefits. The preference map represents not only the membership utility derived from a benefit package, but also includes that of the leadership. If wages are increasingly substituted for fringe benefits, the utility gained thereby by members is increasingly offset by utility sac- rificed by the union; the converse is true for an increasing substitution of fringe benefits for wages. Hence, the indifference curves are convex. Given any level of wages, more fringe benefits are preferred to less; and given any level of fringe benefits, more wages are preferred than less. For any level of expenditures, utility is maximized whenever the respective budget line, analogous to the isocost lines in Figure 1, is tangent to the highest indifference curve, and this point of tangency determines the optimum wage-benefit package for that expenditure. A locus of such optimum points-the union wage-benefit preference path-plots out the optimum packages for all levels of expenditures, The occurrence of inflation tends to increase the utility of wages and can alter the preference map so that a leftward shift of the path results; for any given level of expenditures, greater relative utility is derived by the membership for wage increases than for fringe gains.13 Other events can shift the path in a similar manner.

For a given amount of labor, the optimum package initially preferred by the employer need not coincide with one of the points on the union preference path. Ini- tially the union preference path is expressed in different dimensions than the employer preference path; i.e., respectively, (1) in utility-cost space along a given labor plane, and (2) in labor-cost space along a given utility plane. Hence, given any quantity of labor, the isocost curve appropriate to the nonunion optimum compensation package need not initially be tangent to a union indifference curve in the same (utility) dimension, and the two preference paths need not intersect. (For this rezson, the Edgeworth contract curve analysis is irrelevant.) Presumably, the iinion seeks to move up its path in bargaining, and the degree of its success determines the magnitude of the shift in the employer preference map described above. A bargaining agreement is reached when the parties are able to operate in the same utility-labor space. When this occurs, the intersection of their respective preference paths (which have undergone shifts) defines a settlement, and, given the amount of labor, the compensation level determines the wage-benefit mix.

The Imperfect Labor Market and Fringe Benefits Studies have revealed that there is a positive relationship between

earnings, wage supplements, size of firms, and degree of ~nionizati0n.l~ This in

13 This implies that in periods of tight labor markets, wages will tend to be a higher proportion of compensation. This is consistent with union demands during inflation and with union bargaining power. Excess labor supply may be taken as an index of the tightness of labor markets, where X. = L. - La. If 15 = w/C = h(X,), the above statement implies that dn/dX, < 0, where C is average labor cost. Also, in tight labor markets, where X. + 0, we can expect dn/dC > 0.

14 See Lester, op. cit.; Robert G. Rice, “Skill, Earnings and the Growth of Wage Supplements,” American Economic Review, Proceedings, LVI (May, 1966), 583-592; Leonard Weiss, “Concen- tration and Labor Earnings,” American Economic Review, LVI (March, 1966), 114.

_____-

The Economics of Fringe Benefits / 103 turn suggests that supplemental benefits may be related to imperfect labor markets with rising labor supply curves. In such a market where information also is not perfect, the average labor cost curve (ALC) and the labor supply curve (SL), tradi- tionally treated in economics textbooks as coincidental, can be expected to diverge. Because fringe benefits and outlays on improved working conditions are included in ALC and because the expected value of these benefits to the labor force normally is less than their actual value, the ALC curve will lie above the SL curve. The divergence will be greater the greater the ratio of supplemental benefits to employee compensation.

However, as a limiting case, consider initially a nonunion firm in which fringe benefits are minimal and where ALC and SL coincide. Further, note that, in an imperfect labor market, the marginal revenue product (MRP) of labor may exceed the average labor cost at the level of employment utilized by the firm. The differential is retained by the employer as monopsony profits. Now allow the union to enter with the objective of capturing part or all of these monopsony profits-that is, to remove employee “exploitation.”16 To the extent that the union is able to secure increased employee compensation all in the form of wages, the ALC curve will shift upward. Because the union will presumably strike if any of its employed members receive less than the negotiated compensation, the “effective” labor supply, as distinct from market supply, will be perfectly elastic up to the amount of labor which this compensation will attract from the labor market. Throughout this range, ALC and MLC will coincide.l6 Although there need be no change in the amount of labor actually employed, that “offered” to the employer will increase. In Figure 2, if the union succeeds in raising wages from OW, to OW2, the employer will be able to select ON, workers from a market supply of ON,. The existence of N,N2 surplus labor available to the employer may represent a threat to the union. As noted earlier, the welfare of the union (and existing employees) and the employer can be enhanced by paying part of the increased compensation in the form of fringe benefits. Hence, not all of the increase in employee compensation (and ALC) will be in the form of wages. Although OW2 may represent the average value of the compensation package when ON, labor is employed, the wage itsell may increase only from OW, to, say, OWs, and to the external labor market, the expected value of the package can lie somewhere in between OWs and OWz, perhaps at E(W2). The expected value of the package will attract additional labor equal in amount only to N1N3, and the union finds it much easier to bar entry to this smaller increment than to N,N2 additional workers. Membership carries with it the privilege of receiving higher real benefits.

The expected value of compensation will be higher the greater the ratio of wages to the total bill. However, the actual ratio will be determined by the relative bargaining power of the union vis d vis the employer. This power is influenced by their respective preference functions. As noted above, the employer’s preference is to choose a wage-benefit combination, given the influence of the union, that will minimize his ALC for any given quantity of labor. If the union regards the level of

15 For a discussion of the evidence that union-nonunion wage differentials widen during the initial stages of organization, see my book, Labor Relations and Collective Bargaining (New York: Ronald Press, 1966), Chap. 11 and my forthcoming book, Economics of Manpower and the Labor Market (Scranton: Intext Publishing, 1973), Cha . 16.

16 This corresponds to standard textbook anafysis.

104 / BEVARS MABRY

employment as an exogenous variable and seeks to maximize the utility from the wage-benefit package for its given employed membership, it will seek to influence the employer to raise the total package (i.e., to increase ALC as much as possible without destroying existing jobs). The employer’s accommodation to this pressure is reflected in shifts of his wage-benefit preference path. At this point, it is obvious that analysis of the magnitude of the settlement package leads into the hazy realm of bargaining power the01-y.l~

$ TOTAL WAGES

AND BENEFITS

0

7

FIGURE 2

/

- N, N3 I

LABOR QUANTITY

M LC

\MRP

In the absence of the union, the employer is free to distribute his labor costs among wages and fringe benefits solely according to his preference function. Not only may total labor expenditures be expected to be less than if a union were present, but the ratio of wages to total compensation, given the skill mix of his labor force, can be expected to be higher. Furthermore, the greater the sympathetic pressure of the union movement, the more closely the ratio of wages to total compensation in the nonunion firm can be expected to conform to that of the unionized employer. Hence, in industries with heavy unionization, there may exist only small differentials in these ratios between unionized and nonunionized firms.ls Our limiting case of the coincidence of SL and ALC, therefore, can be expected to

1’ On bargaining theory I have little to add to my earlier model, “The Pure Theory of Bar- gaining,” lndustrlal and Labor Rehtions Reuiew, XI1 (July, 1965).

18 This may explain why Rice, op. cit., found that only for pensions among fringe benefits was unionization a sigdicant dependent variable.


apply only for firms in industries where unionization is virtually absent, or where skill requirements are relatively low.

Conclusions Fringe benefit payments have enjoyed increasing popularity be-

cause they appear to satisfy everyone’s set of preferences: (1) workers receive pref- erential tax treatments and price savings through group purchases, together with convenience in buying and paying for these benefits through automatic deductions where benefits are jointly contributive; (2) employers receive stability in their workforce through reduction in turnover rates; and (3) unions receive membership stability and institutional survival.

This analysis has shown that: (a) Employers, by stabilizing their labor force through the payment of nonwage

benefits, can minimize their average labor costs by choosing the optimum combination of wages and benefits. Where a union exists, this optimum combination is not independent of union preferences.

(b) Although it is in the union’s interest to obtain compensation increasingly in the form of nonwage benefits, its preference function for wage-benefit combinations must identify those combinations that maximize the joint organizational- membership utility associated with any given level of expenditures. The union in seeking to obtain as much compensation as possible influences the employer’s preference map.

(c) Employees can estimate more accurately the expected value of the compensation package than can actual or potential applicants. The expected value of employment with a firm for any applicant is influenced by the proportion of fringe benefits in the compensation package. The expected value determines the offer of labor, and, to the extent that the expected value is less than the actual value, the union and/or current employees are insulated from the competition of potential applicants. Moreover, existing employees may judge the value of their present employment to be greater than that in alternative, external jobs, not because there exists any actual differential, but because expected values differ. Hence, turnover rates are influenced by the payment of supplemental benefits not only because equity values of employees in these benefits increase with tenure but also because they affect the ability of employees to calculate the advantages of alternative employment opportunities.

A number of hypotheses amenable to statistical verification are implied by the analysis presented in this paper :

Turnover rates vary inversely with the magnitude of fringe benefits. These rates are also affected by the rate at which equity is accumulated in such benefits.

The number of manhours worked as overtime varies positively with the ma@- tude of fringe benefits.

Fringe benefits as a proportion of negotiated settlements vary directly with the rate of unemployment.

Costs of administering employee compensation programs vary directly with the ratio of fringe benefits to total compensation.

Job applicants are less well informed of the value of a vacancy than are existing employees.

106 / BEVARS MABRY

The skilled-nonskilled compensation differential exceeds the skilled-nonskilled wage differential.

Intra-union compensation differentials among firms tend to be greater than intra- union wage differentials among the same firms.

The ratio of fringe benefits to total compensation is greater in unionized than in nonunionized firms.

The ratio of fringe benefits to employee compensation tends to be more uniform among firms as the degree of unionization by industry or region increases.

Decertification elections involving national unions are inversely related to the ratio of fringe benefits to employee compensation in firms organized by the unions.

Average labor costs (as distinct from monetary or real wages) are higher for unionized than for nonunionized firms,

the economics of fringe benefits

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