FRINGE BENEFITS AND JOB SATISFACTION UNIVERSITY OF WISCONSIN – MILWAUKEE

ABSTRACT

Fringe benefits stand as an important part of compensation but confirming their role in determining job satisfaction has been mixed at best. The theory suggesting this role is ambiguous. Fringe benefits represent a desirable form of compensation but might result in decreased earnings and reduced job mobility. Using a pooled cross-section of five NLSY waves, fringe benefits are established as significant positive determinants of job satisfaction, even after controlling for individual fixed effects and testing for the endogeneity of fringe benefits.

TABLE OF CONTENT

CHAPTER ONE: Introduction

CHAPTER TWO: Past Research and the Importance of Fixed Effects and Endogeneity Testing

CHAPTER THREE: Data and Methodology

CHAPTER FOUR: Results

CHAPTER FIVE: Further Robustness Tests

CHAPTER SIX : Conclusion

REFERENCES

ENDNOTES

CHAPTER ONE

 Introduction

Establishing the determinants of job satisfaction remains at the forefront of empirical testing in using measures of on-the-job utility. At first consideration, desirable job attributes such as fringe benefits should increase job satisfaction. However, the past evidence is mixed at best and contradictory at worst. While a valuable form of compensation, employer provided benefits may lower earnings or reduce job mobility. Thus, the theoretical impact of fringe benefits on job satisfaction is not immediately clear.

Fringe benefits can impact job satisfaction in several ways. First, fringe benefits stand as an important component of worker compensation. The National Compensation Survey conducted by the Bureau of Labor Statistics estimated that benefits made up 30% of total compensation for all civilian workers in 20061. Some benefits such as Social Security and Medicare are legally required and make up roughly 27% of all benefit compensation. The remaining 73% of benefit compensation is comprised mostly of paid leave, insurance plans and retirement and savings plans. These benefits are often not subject to taxation and are therefore cheaper to gain through an employer than through the market (Alpert, 1987). Consequently, cheaper benefits should increase worker job satisfaction.

Second, fringe benefits can act as substitutes for wages. Baughman, DiNardi and Holtz-Eakin (2003) examined employer survey data and found that employers decreased wages once several benefits had been offered to employees after a few years. Woodbury (1983) found that workers also view benefits and wages as substitutes, willing to give up wages in exchange for more benefits. This substitution can increase job satisfaction if the worker’s marginal income tax rate increases. The less taxed fringe benefits can be substituted for wages and increase job satisfaction by saving the worker from increased tax burden.

Third, the substitution between wages and benefits can have a negative impact on job satisfaction if workers find they must sacrifice wages and accept provision of a fringe benefit they do not necessarily desire. For instance, workers’ spouses may already have provision of a particular fringe benefit, so a second provision of that fringe benefit may be viewed as wasteful and can therefore decrease job satisfaction. On the other hand, workers may find a particular fringe benefit as essential. As a result workers may have a feeling of job-lock to a particular employer or job if they are uncertain about the provision of the necessary fringe benefit at a different place of work. This combination of uncertainty and job-lock can decrease job satisfaction as well.

Since the expected impact of fringe benefits on job satisfaction is unclear, it is not surprising that past research is inconclusive. When included in typical estimates, the impact of fringe benefits on job satisfaction is rarely significant. In addition, the evidence mainly depends on cross-sectional comparisons, raising questions about potential biases. First, the impact of a particular fringe benefit on job satisfaction can be misleading if the worker has unmeasured individual specific determinants of job satisfaction. Indeed, we cannot assume that workers are randomly sorted into jobs but rather that they sort themselves into the jobs that suit their preferences. In addition, job satisfaction and fringe benefits may be simultaneously determined such that fringe benefits are endogenous in determining job satisfaction.

Thus the relationship between fringe benefits and job satisfaction has not been appropriately tested. Very little past research has isolated and examined fringe benefits as a primary determinant of job satisfaction, few studies have included as many fringe benefits as are available in the National Longitudinal Survey of Youth (NLSY) and none have studied the relationship between fringe benefits and job satisfaction in detail, controlling for fixed effects and endogeneity.2

In distinction to past results, a pooled cross-section of five NLSY waves confirms the importance of fringe benefits in determining job satisfaction. Then, in order to test for the simultaneous determination of fringe benefits and job satisfaction, a recursive bivariate probit model is used to test for the possible correlation between the disturbances in job satisfaction and fringe benefit structural equations. The cross-equation correlation is not significantly different from zero, implying that fringe benefits can be treated as exogenous in an estimation of job satisfaction and can be properly estimated within the ordered probit framework used in the pooled cross-section. Finally, the role of unobservable characteristics is controlled for by estimating fixed effects regressions.

The following section discusses the results of previous research as well as the importance of controlling for fixed effects and testing for endogeneity in determining the relationship between fringe benefits and job satisfaction. Section three outlines the data and empirical methodology used to control for fixed effects and endogeneity. Section four discusses the results, section five outlines further robustness checks and the final section concludes.