Comparing benefit costs for full- and part-time workers

Michael K. Lettau is an economist in the Office of Compensation and Working Conditions, Bureau of Labor Statistics. Thomas C. Buchmueller is an assistant professor at the Graduate School of Management, University of California, Irvine. Employers’ costs for total benefits grew roughly 50 percent faster than employee wages over the 1980–96 period, according to the Bureau of Labor Statistics Employment Cost Index (ECI). By March 1996, nonwage compensation represented 28 percent of total compensation for U.S. private workers. Given these figures, it is not surprising that there is great interest among economists and other analysts in the role that benefits play in labor markets. Simple labor market theory suggests that employers mainly are concerned about the level of total worker compensation (wages, salaries, and benefits), and that, apart from tax considerations, they consider the division between cash wages and other compensation of little economic consequence. However, this simple approach ignores potentially important differences between wages and benefits. It is commonly asserted that benefits represent quasi-fixed costs, meaning that they vary with the number of workers rather than with the number of hours worked. To the extent that this is true, the structure of employee compensation packages may influence employers’ demand for fulland part-time workers, as well as their decisions on the use of overtime. The assumption that benefits represent quasifixed costs is common in studies of the effect of benefits on decisions of employers and employees. The basis for this assumption, however, is somewhat tenuous. For many benefits—such as defined contribution pension plans and certain types of paid leave—costs are a direct function of cash earnings and thus are proportional to the number of hours worked. And while this generally is not the case for benefits such as health insurance, employers can at least use employee contributions to vary the costs of such benefits by employee hours. By comparing the costs to employers of providing various benefits to fulland part-time workers, this article directly tests the hypothesis that benefits represent quasi-fixed costs. It also examines the extent to which these costs vary across different types of benefits. The results suggest that, because it is the only benefit for which the average per-hour cost is greater for part-time workers than for full-time workers, health insurance is the only benefit representing a true quasifixed cost to employers.