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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2023 Grand Challenge: Workforce Disrupted
Market-Based Solutions to Vital Economic Issues
Aug 26, 2022

Firms with Benefits? Nonwage Compensation and Implications for Firms and Labor Markets

Nonwage benefits have become increasingly important and now represent 30% of total compensation (BLS, 2021). Using administrative data on health insurance, retirement, and leave benefits, we find dramatically lower within-firm variation in benefits than in wages. We also document sharply higher between-firm variation in nonwage benefits, compared to wages. We argue that this pattern can be a consequence of nondiscrimination regulations and the high administrative burden of managing too many or complex plans. Consistent with this mechanism, we show that the presence of high-wage workers in unrelated divisions of a firm as well as workers hired in high-benefit local labor markets positively predicts their colleagues’ benefits, controlling for occupation, wages, state, and industry. This dynamic has implications for employee turnover. We find that the resulting high benefits reduce employee departures, particularly among low-wage workers, for whom the benefits comprise a larger percentage of total compensation. We also find evidence that firms with more generous nonwage benefits reduce their reliance on low-wage workers more than low-benefit peers, suggesting that constraints to the provision of benefits affect the distribution of human capital across firms.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.

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