The wage-pension tradeoff: Determinants of employee and employer preferences

As the share of total labor compensation that is nonwage benefits has risen, so has the need to understand the impact of such benefits on economic behavior. Analysts and policymakers most frequently cite tax-preferred status to explain the growing importance of nonwage benefits. Because the two types of compensation by accepting some payment in noncash form. Therefore, this study proposes that the share of total compensation taken as benefits is an increasing function of marginal tax rates.;Attempts to identify factors that explain the wage-benefit trade-off and to establish the role of tax treatment have been limited by difficulties in measuring the value and cost of noncash compensation and data restrictions. This study addresses the wage-pension trade-off and the impact of tax policy using a microdata base to more reliably estimate marginal tax rates and the value of pension benefit compensation. The microdata base is the 1983 Survey of Consumer Finances and its supplemental Pension Provider Survey.;The study uses Tobit analysis to test a model of employees' relative preferences for wage and pension compensation, based on neoclassical utility and production theory. The study examines possible employer motives for supplying fringe benefits, as a first step in developing a complete model to explain the observed equilibrium wage-pension compensation mix.;Study results of the empirical analysis support that tax treatment of private pension plans play a significant role in explaining the preferred wage-pension compensation mix. However, the study concludes that the magnitude of the effect is smaller than previous studies estimate. These results suggest that a ten percent decrease in the mean tax rate reduces the pension share of compensation by four percent. Several firm-specific and employee-specific characteristics traditionally associated with pension coverage, firm size, and job tenure also significantly influence the preferred wage-pension mix.;This model left approximately half of the variance in the pension share unexplained. This outcome and the failure to fully account for "supply-side" behavior suggest that determining the observed market equilibrium compensation mix is too complex to be fully explained by economic models.