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September
2004, Vol. 127, No. 9
Accounting for wages and benefits using the ECI
Jonathan A. Schwabish
Accounting for employee benefits as a form of real compensation for work has received much theoretical and empirical attention. The hedonic theory of compensating wage differentials, first made popular by Sherwin Rosen, contends that workers make tradeoffs between wages and benefits.1 That is, in lieu of lower wages, workers are compensated by taking the greater benefits offered by employers. Empirical approaches to estimating the tradeoff however, have generally failed to correspond with theory. A slew of econometric difficulties are only the tip of the iceberg梪nobserved worker and firm heterogeneity, measurement error, present discounted value issues (especially for pensions), and group discounts (especially for health insurance) complicate estimation. In addition, data sets often lack the necessary variables to construct and estimate hedonic models. There are few data sets that have enough variables to create such models but even fewer are nationally representative, containing employer and fringe benefit characteristics as well as employee (demographic) information. The hedonic model competes with what is commonly known as the "good jobs, bad jobs" story.2 An observable feature of the labor market, the "good jobs, bad jobs" story asserts that workers with high wages also receive high benefits. However, perhaps within a job there are compensating wage differentials, which would put the hedonic and "good jobs, bad jobs" models in concert. Subsequently, workers at the bottom end of the income distribution may be forced to switch jobs in order to obtain a preferable benefit-wage mix and those at the top of the distribution may be better able to change the mix within their current job.
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Footnotes
1
Sherwin Rosen, "Hedonic Prices and Implicit Markets: Product
Differentiation in Pure Competition," The Journal of Political Economy,
January 1974, pp. 34�.
2 Gary W. Loveman, and Chris Tilly, "Good Jobs or Bad Jobs: What Does the Evidence Say?" New England Economic Review, (January/February, 1988), pp. 46�.
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