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December 1989, Vol. 112, No. 12
Employer-provided benefits: employer cost versus employee value
Melissa Famulari and Marilyn Manser
Employers compensate their employees not only with cash, but also with noncash payments. The latter, sometimes called "in-kind" or "fringe" benefits, include some that are legally required, such as Social Security, workers' compensation, and unemployment insurance, and some that are not, such as paid leave, health and life insurance, and pensions. This article discusses the effort of economists to measure the value individuals place on noncash payments.1
Economists have developed the concept of "cash-equivalent value" to measure the value of noncash benefits to an individual.2 A person's cash-equivalent value is the least amount of money he or she would be willing to accept in exchange for not receiving particular noncash goods. When applied to an employer-provided benefit, the cash-equivalent value is the minimum amount of additional cash compensation the worker will accept in lieu of receiving the benefit. Although some estimates of cash-equivalent value for Government-provided in kind benefits such as food stamps, public and subsidized housing, medicaid, and medicare exist, little has been done to quantify employer-provided benefits, primarily because of a lack of data. Moreover, even if data were available, a variety of problems have made it difficult to implement the cash-equivalent value approach.3
Information on the employer's cost of providing the benefit is readily available through the Bureau of Labor Statistics' Employment Cost Index (ECI) program. To what extent does employer cost approximate employee value? We believe that there are various biases associated with using employer cost as the measure of the employee's value of employer-provided benefits. These biases can result in misleading conclusions.
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1 The focus is on the employee value of employer-provided noncash benefits, as opposed to job characteristics, such as safety, security, and cleanliness. For the purposes of this article, the chief distinction between the two is that there exists an explicit market for noncash benefits. As a result, while many measurement issues are conceptually the same for both job dimensions, in analyses involving benefits, one must always take into account the fact that the employee could have purchased the benefit on his or her own.
2 A detailed discussion of the notion of cash-equivalent value and its relation to measurement issues in the case of Government-provided transfers is given in Timothy M. Smeeding, "Alternative Methods for Valuing Selected In-Kind Benefits and Measuring Their Effect on Poverty," Technical Paper No. 50 (Bureau of the Census, March 1982); see also Bureau of the Census, Proceedings, Conference on the Measurement of Noncash Benefits, vol. 1, December 12-14, 1985. Considerations that arise in the context of employer-provided benefits are treated in Jack E. Triplett, "An Essay on Labor Cost," in J.E. Triplett, ed., The Measurement of Labor Cost, NBER Studies in Income and Wealth, vol. 48 (Chicago, University of Chicago Press, 1983), pp. 1-60.
3 See, for instance, Smeeding, "Alternative Methods"; Triplett, "Essay on Labor Costs" Bureau of the Census, Proceedings; and Marilyn E. Manser, "Cash-Equivalent Values from In-Kind Benefits: Estimates from a Complete Demand System Using Household Data," Working Paper No. 173 (Bureau of Labor Statistics, December 1987); as well as studies cited in these references.
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