Salary or Benefits?∗

Employer-provided benefits are a large and growing share of compensation costs. It is often efficient for employers to provide benefits because firms have a comparative advantage (for example, due to scale purchasing or tax treatment) in purchasing relative to employees. I model two factors that can affect the value created by employer-sponsored benefits — costly search for employees whose preferences match the benefits a firm offers and the fact that some benefits can reduce the marginal cost to an employee of extra working time. I use employee benefits data from the National Longitudinal Survey of Youth to investigate how these factors contribute to the salary/benefit mix. I provide evidence consistent with firms using benefits to ease the costs of working long hours, to create value in long-tenure relationships, and to exploit the cost advantages they have in procurement. ∗I thank George Baker, Ed Lazear, Scott Schaefer, Kathryn Shaw, Jan Zabojnik, and participants in the 2004 European Summer Days for comments. Address: 518 Memorial Way, Stanford, CA 94305-5015. e-mail: [email protected]. Phone: (650) 736-1047. USC FBE/CLEO APPLIED ECONOMICS WORKSHOP presented by Paul Oyer FRIDAY, Oct. 15, 2004 1:30 pm 3:00 pm, Room: HOH-601K “Concierge services, petsitting, nap rooms and the option to telecommute are really just sneaky new ways to get already overworked employees to toil even harder, says Jill Andresky Fraser, author of White-Collar Sweatshop. ‘These perks are often illusory. They exist just for their publicity value,’ she says. ‘In reality, staff face resentment if they try to work from home or take family days. And free food, nap rooms and home computers just keep people tied to their work.’” — Economist (2000)