Maam Sadia Sherbaz International Political Economy April 25, 2012

Endogenous Fringe Benefits, Compensating Wage Differential and Older Workers

By Gail A. Jensen and Michael Morrissey

A REVIEW ON Endogenous Fringe Benefits, Compensating Wage Differential and Older Workers By Gail A. Jensen and Michael Morrissey
(In Partial fulfillment Of Requirements for Course of Labor Economics)

Hajra Batool Salma Hussain M.Econ v

Fatima Jinnah Women University The Mall, RawalPindi

Article

Endogenous Fringe Benefits, Compensating Wage Differential and Older Workers

By Gail A. Jensen and Michael Morrissey
This article Endogenous Fringe Benefits, Compensating Wage Differential and Older Workers has been written by Gail A. Jensen and Michael Morrissey. As the name of the article illustrates that this article has been written to study the wage- health insurance tradeoff for older U.S workers means that the workers pay for health insurance in the form of lower wages or reduction in other forms of compensation. An increase in one form of compensation i.e. adding health insurance benefits, must result in a cutback in some other form of compensation Fringe benefits mean any non-wage payment or benefit granted to employees by employers. Examples include pension plans, profit-sharing programs, vacation pay, and company-paid life, health, and unemployment insurance. The paper has two objectives: 1. To estimate the magnitude of compensating wage differential that exists when health insurance is offered to workers. 2. To demonstrate that much of the empirical difficulty to date in obtaining reasonable estimates of the wage adjustment likely results from a failure to consider the job insurance choice as endogenous. So the writer used the data from 1994-1998 which was obtained by Health and Retirement Survey data to accomplish the above objectives. According to the theory Marginal 2

Productivity of labor is equal to the wages and fringe benefits. So the studies conducted, said that only those persons insure their health who have high wages not those with lower wages. The authors reply to these studies that the compensation is based upon the productivity and employers try their best to find such workers whose productivity is higher, whereas older workers because of their low productivity are paid less wages. However, wages and insurance depends upon the profit maximizing decision of firms and utility maximizing choices of workers. There is a negative relationship between wages and health insurance that is, the workers with low health insurance are paid high wages and vice versa. Jensen and Morrissey present in their model Wage insurance package that worker supply their services for those jobs where they expect maximum utility, and they are compensated more whereas employer or firms decision for the compensation of worker depends upon how much profit it earn. According to hedonic wage function for workers the compensation to the worker is equal to his/her Marginal value product (MVP). This compensation includes fringe benefits and the cash wages. The compensation given by employer is inversely related to other health insurance carried and positively related to workers loss. According to the model workers fringe benefits are of three types: Receipts of employer sponsored health insurance in the workers own name. Enrollment in a pension plan. Annual paid vacations.

All above three types of fringe benefits are endogenous. This model was overidentified so the authors used 2SLS (two stages least squares) method to overcome the problem. So it is necessary to capture the effect of omitted factors in disturbance term which give rise to correlation between them. Secondly a risk averse person will be more careful for getting health insurance from employer and will choose a secure job. Results of the model support the theory and estimation conducted by Jensen and Morrissey. The workers who already have an alternative source of income are more likely to take jobs that do not provide health insurance. At the policy level our findings are encouraging. If labor markets do adjust to reflect the nature of compensation bundle the implications of policy analysts are correct by providing 3

raise taxes then it will shift the untaxed forms of compensation. If insurance coverage is provided from public sector job then it will crowd out private sector jobs. All this suggests a number of future research initiatives. Obviously, new research should focus on the endogenity of coverage (compensation) and look for data that allows one to explore the simultaneous determination of wage and benefits decision.