Price of fringe benefits

What might cause the price of fringe benefits to fall so that the curve flattens out?

  1. Tax Advantages to the Employer ­ A variety of employer taxes (such as SS and other payroll taxes) are levied on the amount of wages paid. Compensating workers with fringes instead of wages lowers these taxes for the employer.
  2. Economies of Scale ­ Significant economies of scale usually exist in the collective purchase of fringe benefits that lower their prices to buyers. In addition, group purchases eliminate the adverse selection problem inherent in insurance. To the extent that cost savings have increased historically as the size of firms has grown, the optimal amount of fringe benefits has also grown.
  3. Efficiency Considerations ­ Employers can use fringe benefits to tie workers to the firm, reducing turnover and hence lowering training costs. These are deferred payment schemes.
  4. Fringes are “Income Elastic” ­ Many fringes are “luxury goods”, that is, the demand for them rises as income goes up. So, as incomes have gone up over time, workers demand more of their compensation in fringe benefits rather than income.


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