Using linked employer-employee data to analyse fringe benefits policies. Norwegian experiences. Workshop on Making Linked Employer- Employee Data Policy Relevant Harald Dale-Olsen Institute for Social Research

Why study fringe benefits? Non-wage labour costs account for between 15 and 40 percent of total labour costs in major OECD countries (Hart et al.,1983). Non-wage elements are becoming more important. Fringe benefits in percent of total compensation increase in the USA from 4.9% to over 10% from 1960s to 1990s (Woodbury, 1983;Hashimoto,2000). In Norway establishments offering fringes have increased from 29.4% in 1995 to 57.9% in 2002, but only small changes in the amount of fringes on average.

Fringe benefits for five educational qualifications

Policy related questions Why do employers provide fringe benefits? What are the gains for the employers? Do fringes ”work” as intended? Do workers appreciate fringes? More than wages? Is it possible to identify a ranking of fringes?

Answers and implications Fringe benefits are very effective means to achieve the desired supply of labour. For a given level of total compensation, more fringes reduces worker turnover. In 2002 workers in private large establishments willing to pay (on the margin) 11 NoK in wages for fringes valued 2 NoK. Child care is particularly valued. Economy average for workers MWP is 3 NoK. Employers seldom offer fringes to save pay-roll tax, but primarily to recruit/retain workers (which they also achieve). Increasing the share of fringes yields higher total factor productivity. Increasing the share of fringes is associated with lower establishment closure hazard. Provide a well-designed menu of fringe benefits and achieve reduced worker turnover, improved productivity and improved longevity.

Outline of the presentation How should fringe benefits be understood? A brief discussion of previous studies on fringe benefits. Data issues. How to evaluate workers’ MWP for fringes? Fringes and the impact on productivity. Fringes and the impact on closure hazards.

Perspectives on fringe benefits Equivalent to money wages? Price issue 1– market power and ownership Price issue 2– pay roll and earnings taxes Price issue 3 – fringes not readily available as medium of exchange Equivalent to non-wage amenities, i.e., non- pecuniary? Fringes singled out from the basic wage: endowment/framing effects and biases of judgement. Regardless of perspective: deferred compensation, bargaining, discrimination, motivation

Fringe benefits in previous literature Overtime and tax issues (Ehrenberg,1971), Fringe benefits used as a discriminatory device (Carrington, McCue and Pierce,2002), Employer-provided health insurance (Olsen, 2002), Pension schemes create job lock issues (Madrian, 1994; Ippolito, 2002) Pension schemes do NOT create job lock issues (Kapur, 1998; Gilleskie and Lutz, 2002); Increasing the relative amount of fringes in the compensation package reduces worker turnover even when controlling for unobserved worker ability (Dale- Olsen, 2005).

How to measure workers’ MWP for fringe benefits? Traditional method: Hedonic wage regressions; Alternative method: Assume workers’ quit rate depends on the utility flow from the job. Study how the quit behaviour of workers is affected by wages and fringes, i.e., use the quit behaviour as a linking key; Method developed and used to evaluate work environment hazards (Gronberg and Reed,1994; Hwang, Mortensen and Reed,1998) and commuting(Van Ommeren, van den Berg and Gorter, 2000).

Data 1 Linked employer-employee data. Comprise all jobs, all establishments and all workers Possible to study mobility of workers and entry/exit- dynamics of establishments. Data contains information on employment spells, wages (hourly wage only), fringe benefits as valued by tax authorities, working hours, educational attainment, gender, industry codes, location. For establishments in Flexi97/ABU2003 and industry statistics: value added, capital, investments.

Data 2 Questionnaires, Flexi97 and ABU2003. Answered early winter 1997/2003 by the daily manager or personnel manager of roughly 2300 Norwegian establishments. Sampled from both public and private sectors establishments with more than 10 employees. Stratified sample of establishments, over- sampling of large establishments. Non-public administration employers in ABU2003 asked about what kind of fringes provided and motivation.

Provision of fringe benefits 2002

Establishment size, wages and fringes

Variation in wage and fringe benefits policies Fringes primarily related to establishment productivity contingent on workforce qualification. But establishments with low qualified workers often provide child care, while establishments with high qualified workers provide holiday home.

The impact of wage and fringe benefits policies on workers’ quit hazards (in percent)

The impact of fringe benefits policies on workers’ quit hazards

Marginal willingness to pay for fringes

Compensation policy and worker turnover

Why provide fringe benefits?

The impact of fringe benefits policies on total factor productivity (in percent). ABU2003 and manufacturing.

The impact of fringe benefits policies on establishment closure

The impact of new work practices on establishment closure