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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.
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