14. Fringe Benefits

IF THE strike-threat system has failed to transfer income from investors to workers, has it not at any rate insured that the general “conditions of labor” were improved? I propose to show (a) that the costs of all amenities enjoyed by employees at their place of work and such pecuniary perquisites as “severance pay,” “vacation pay,” pensions, and so forth simply represent certain uses to which labor’s remuneration is (with or without the individual worker’s approval) devoted; and (b) that managements (representing investors) had never to be fought to secure permission for the workers to devote their earnings to such objectives.

We have noticed that, apart from rising real earnings, the chief ways in which the “working classes” benefited during the industrial revolution were firstly in the form of an amelioration of the general working environment (as well as an equally noteworthy improvement in domestic living conditions), and secondly (although often via confused and irrational motivation) the choice of greater leisure in preference to a more rapid growth in material well-being (that is, in food, clothing, shelter, and so forth).

The process of distributing part of the fruits of rising real earning power in other forms than “wages” (in the narrower definition of that term) has grown steadily down to the present age. Wage rates in the sense of labor costs per unit of labor input have been increasingly offered as amenities which are purchased, so to speak, for the worker out of his earnings, by decisions which he is unable individually to influence. The kinds of things acquired for him in this manner cover a wide range, and the proportion of his earnings (that is, of labor costs) of which the utilization is removed from his personal discretion seems to vary widely. At one extreme, deductions for “fringe benefits” can cover a large proportion of the taxes for which the employee is liable. They might include, for instance, health, accident, disability, and other insurance premiums for himself and his dependents (that is, for maternity benefits or family endowment, pension contributions, “saving-up” for vacations (“vacation pay”),¹ unemployment compensation (“lay-off pay”), certain minimum savings allocations on his behalf, “profit-sharing” rights, etc. Sometimes deductions for specified benefits are stipulated by legislation, but most often it is the union and not the government which dictates or overrules individual preference in these matters.

The growth over the years in the proportion of wages enjoyed in non-monetary terms, I judge to have been chiefly an automatic consequence of rising working-class affluence. As the real value which consumers have bid for labor’s inputs has risen, the appropriate standards of conditions of service have seemed to rise more than proportionally. It is this which creates the chief justification for the imposition of the “choice of benefits” purchased through deductions from the full cash value of labor’s contribution. Rising earnings during the present age have made it possible to argue somewhat confidently that the workers can now afford these new objectives, especially in so far as they have concerned indirect provision for the future. As economists put it, the immediate future on the workers’ scales of preference has fallen in relation to the more distant future. That is, perhaps, one reason why union members have not come to cry more often, “wages, not fringes.”

The partition of labor’s remuneration between pecuniary and non-pecuniary forms is obviously independent of the factors which determine labor costs. The profitable employment of labor in any field is a function of total costs. Always it is the contractual price of work done, which includes any noncash rights, that is offered, “collectively bargained” and conceded. The value of fringes could have been received as money earnings had that been preferred. They do not, in themselves, entail any superimposed cost burden.

Yet the unions have created the impression that the worker’s share of income can be effectively devoted to things like provision for retirement and disability only through aggressive union pressures! The truth is precisely the opposite. The payment of part of contractual remuneration as amenities or rights of money’s worth, instead of in money itself has, on the whole, been encouraged by normal entrepreneurial incentives. Managements have had an obvious interest in the health, efficiency, comfort and contentment of personnel, and generally in the wise use of wages; and the fact that the advantages for which the worker is called upon to sacrifice money earnings are usually of a kind that contribute sensibly to his and his family’s genera! well-being (including their security) is recognized as tending to discourage avoidable labor turnover. Hence although firms have mostly been averse to offering payment of wages in kind, except in the form of maintaining safe and pleasant working conditions as the best way of retaining or attracting staff, the profit incentive has, especially during this century, encouraged recourse to what has been termed (not very appropriately) “nonprice competition” for labor. Often the method is, indirectly, that of deductions from wages to meet “employers’ contributions” to insurance, pension or other “benefit” funds. Money wage rates in the narrow sense have for this reason risen less rapidly than would otherwise have occurred.² But managements would never have resisted the acquisition of things like health or medical insurance, retirement contributions or other nonmonetary disposals of labor’s remuneration out of an unchanged aggregate labor compensation. On the contrary, managements have had every incentive themselves to offer the security and stability which the market for thrift and insurance can guarantee when such an offer has been judged to be an effective competitive inducement. (And managements can usually provide at least cost the administrative machinery required for group savings and insurance.) They have equally had an interest in offering all the amenities which make industrial or commercial enterprises safe, healthy, and happy establishments. The executives of this generation know that it is as important to achieve a harmonious atmosphere among personnel as it is for universities and colleges to strive for such an atmosphere among staff and students. Often they find it profitable to invest in objectives which, in some cases, can create the tone of a friendly club; although their efforts can hardly succeed if infiltrators instructed to sabotage the attempt are tolerated or unidentified (see pp. 50, et seq., 87-89).

That managements (on behalf of investors) will tend generally to favor any system under which what amount to deductions from money wages finance “fringe benefits” is seldom perceived. This is in part because it is in the interests of the union hierarchies to represent fringe benefits as something additional to wages—an element wrested by negotiation or struggle from investors. But managements also (as we have seen, pp. 69-71) typically feel it to be strategically advantageous to allow it to appear that the benefits are essentially “employers’ contributions,” wrung from “profits” through the “bargaining power” of concerted action. Large concessions in money wages can then be avoided by small but showy concessions in fringe rights. It can be said, I think, that the psychological value of fringe benefits has frequently been greater than their cost under strike-threat bargaining. While union officials can say to their members, “Look at what we have won for you,” managements can say, “Look at what we are doing for you.”

Moreover, partly because public opinion is a factor in strike-threat strategy (see pp. 47-48), unions find it expedient to negotiate for additional compensation in fringe benefit forms, which tend to stand in a good light with the public. When they do so, they naturally encounter normal managerial resistance, not to concessions in that form, but to additional labor costs imposed by duress. The intended purpose to which the increased per capita claim on the value of the product is to be devoted is of subordinate importance in relation to labor’s input costs.

We must recognize, then, that “the workers” have never had to fight to win the right to invest part of their earnings in provision for their future, or the right to devote some part of their wages to chosen amenities. Empirical studies on this topic are complicated because legal enactment (mainly in respect of health and safety) often removes the workers’ (or the managements’) discretion.³

I am inclined to think that the developments we are considering would most likely have gone further and had even more far-reaching consequences had it not so often been union tactics to maintain an atmosphere of veiled antagonism toward labor’s partners (see pp. 50, et seq., 87-89). The psychological warfare strategy, which is the inevitable concomitant of aggressive unionism, has militated against managerial incentives and initiatives to educate the worker to a wiser choice of ends as his means have grown. The scornful cry of “paternalism” has, in large measure, frustrated the not disinterested benevolence and leadership of managers. An enlightened use of labor’s share (where managements can persuade labor to accept it) is universally to investors’ advantage. In particular, the allocation of revenues to the creation of a pleasant atmosphere in the work-place can be more effective than “generous” wage rates as a means to the achievement of a contented and loyal staff with low labor turnover.⁴

The only real opposition which might be expected to fringe remuneration as a mere deduction from money earnings, that is, after contractual labor costs have been determined, is from the rank and file of union members. One can understand the workers wishing to express their own preferences. Indeed, only if the unions’ pressures for partial payment in that form can be regarded as educative of their members, or if the inclusion of all members in an objective enables material economies from which all may benefit⁵, is the removal of the decisions from voluntary choice (of workers remunerated) defensible in a free society. And whether the disposal of such withholdings from the worker’s pecuniary earnings has been genuinely educative or a restraint on his freedom is not easy to judge. In my own judgment, fringe benefits have been on the whole to the advantage of the bulk of the union members.⁶ Artisans and laborers tend notoriously to be improvident; and the illusion that “the employer” has been meeting the cost may alone have persuaded the workers to allow the use of part of their earnings in so sensible a manner. In other words, the unions may, partly as an incidental consequence of the tactics of strike bargaining,⁷ have imposed a beneficial educative compulsion upon their members.

Some readers may feel, however, that it is by no means certain that free market pressures could not have achieved a far more rational choice of leisure and nonpecuniary forms of remuneration. Some libertarian scholars would claim, I think, that through the unhindered substitutions which constitute the competitive process, more efficient health, sanitary and safety conditions, and cheaper, less discriminatory insurance and retirement benefits might have been attainable. And it is indeed true that, provided the objectives which make up noncash remuneration would actually have stood high in the workers’ scales of preferences, negotiations uninfluenced by fears of strike-threat compulsions could have brought forth a more satisfactory response to demands for these objectives. Had such ends really been individually demanded, they could have been met as effectively as demands for beer, baseball, and television, and often at a lower cost. With rising real incomes, and commercial incentives to offer and publicize endowment, health and disability insurance, many workers might well have decided, quite voluntarily, to make their own provision for old age and security. Obviously, every employee could arrange independently for investment of some part of his earnings in these objectives if he wished.

On the other hand, there are economists who insist that social justice requires a certain measure of forced thrift upon those persons who, if they do not make their own provision for the future, are apt to become a burden on others. This is a judgment which some “libertarians” question but which cannot be lightly dismissed. In so far as remuneration in the form of insurance or pension benefits has effected a guaranteed provision for old age and against the unpredictable contingencies of life, it has imposed a wise use of income on the worker. Nor can we reject the possibility that, through the bargaining strategy of the unions, a “beneficial” influence may have been indirectly exerted upon the composition (as distinct from the value) of labor’s compensation—an influence which managements themselves may have been unable alone to exert.⁸

In using the adjective “beneficial” here I must insist that it is based on a challengeable but not necessarily wrong philosophical premise. John Stuart Mill argued that the overruling of an individual’s preferences and actions for his own good (by the tyranny of public opinion or indoctrination and private or government compulsion) is never justified. The individual’s “own good,” he contended, either physical or moral, “is not a sufficient warrant.” But as I see things, a compulsion intended superficially to protect an individual (torn possible future distress may force him to pay for the provision made and protect others who might otherwise be called upon (through their charitable feelings or through taxation) to support him when things go wrong. That is, the confiscation of wages for investment in insurance against employment hazards or retirement pensions may be held to protect others rather than primarily assist the wage receiver whose free choice is overruled. Certainly an improvident person or a drug addict is likely later on to become a burden on the charitableness of the provident or the taxpayer and the ethical consensus surely does make it appear desirable that the charitable should be protected from the full cost of having to shoulder support of those whose earlier thriftlessness or other irresponsibility has landed them (and perhaps their dependents) in destitution.⁹ Again (a less obvious point), any compulsory thrift element is likely to improve a worker’s morale and productivity.

Nevertheless, with certain kinds of benefit, such as costly seniority privileges in respect of “employment security,” it seems as if many adversely affected would object vigorously if they had any say or if they understood; and this could apply in other circumstances also. F. A. Harper has aptly illustrated the difficulty by means of an imaginary letter to management from a worker, referring to “paid vacations,” saying that his family needed the extra income more than he needed the extra week of leisure. “Please reconsider this fringe detriment you have imposed on us.”¹⁰ Managements could, of course, specify the contractual remuneration as, say, $400 per month, of which $325 is the monthly pecuniary wage, $20 pension or provident fund contribution, $15 health, medical and workmen’s compensation insurance benefits, $20 provision for “paid vacations” and $20 for all other fringe benefits, including health and safety costs. But most managers would feel that to attempt to enlighten their staff in this manner would do more harm than good.

Opposition to fringes sometimes does occur among the rank and file in the unions. They have been known to refer to nonpecuniary benefits as “jam on the pudding,” “gravy on the meat,” or “trading stamps instead of cash discounts”; and such cynicism often has more than an element of shrewd justification. Yet as we have seen, it is indeed possible—and the possibility must not be minimized—that the educative persuasions needed to induce the typical artisan or laborer to sacrifice cash wages for such things as contributions to group medical insurance or provident and pension funds, have been achievable only through reliance upon the illusion that the “employer” can be made to pay. The very term “employers’ contribution” itself perpetuates the probably beneficial delusion (see pages 206-209). Noncash compensation, however advantageous for the worker, may not otherwise have been regarded as an effective competitive inducement in the attraction and retention of labor. But although the illusion may have been indirectly to the worker’s advantage, the student of these things ought not to be left under any misapprehension. Fringe rights and benefits are an alternative to cash receipts, while cash wages plus such rights and benefits are in general met by consumers, not by stockholders.

I have referred to the incidental advantages which the reduction of pecuniary wage rates under union pressure, to pay for noncash or fringe compensation (sometimes called, misleadingly, “nonwage” benefits), may be held to have achieved. But we must beware of assuming that such advantages are universal and automatic. Most often they are mere mitigations of the strike-threat system. What must always be kept in mind is that every duress-imposed rise in the cost of labor inputs, as distinct from every change in the relative cash and noncash portions of labor’s remuneration (which need not raise labor costs), reduces the flow of wages and renders the distribution of the flow less equal and less equitable. And certain forms of fringe benefit seem to be particularly likely to be sought (by way of the strike threat) only when the price of labor can be forcibly raised for the advantage of those who retain their jobs at the higher labor price, or who can monopolize the occupation in face of a rising demand schedule for the product.

Consider, for example, “job security” as a “fringe benefit.” There have been successful strikes to prevent announced dismissals. But this is one of the ways in which the disinvestment of the assets in an undertaking can be accelerated and the mere prospect of which can destroy wage-multiplying developments on a great scale. The security of all workers is clearly reduced thereby. The same objection applies of course to job security in the form of “severance pay” or “lay-off pay,” or of contractual discrimination on the grounds of seniority (length of service in the industry or firm) in the event of dismissals when labor comes to be priced out of employment.¹¹ And when the right of managements to dismiss redundant workers in general is not challenged, the inclusion of “job security” provisions in an employment agreement almost necessarily means greater security for some at the expense of lessened security or reduced earning power for others.¹²

When simple guaranteed employment for a stipulated period is offered without discrimination and in a free market, it is an indication of great managerial confidence in demand and supply conditions in the industry, and especially of trust that those employed will not resort to the strike threat to destroy investors’ security. When such a contract is offered, it is nearly always one-sided, that is, with no “lock-in” provision. It is offered simply as a type of competitive labor attraction through which managements believe that they can buy the services of certain people at least cost. But contractual employment security as a competitive inducement is rarely found. Typically, it is forced on managements by strike-threat duress, and accompanied by a substantial rise in prospective labor costs at the time of its imposition. This can be so even when it takes the relatively reasonable form of long dismissal notice requirements. The enhancement of costs brought about for that reason must curb the rate of growth (or cause the decline) of any undertaking or industry compelled to accept it, not because the unions prefer their members to sacrifice pecuniary earnings for it (the reduced cash incomes providing, so to speak, premiums for employment insurance), but because, in those circumstances, labor costs as a whole increase and cause thereby a greater degree of contrived scarcity. Moreover, any benefits achieved are likely to favor specially powerful interests within the unions, particularly when discrimination on grounds of seniority with the firm or industry is required for lay-offs; and there are several other ways in which noncash forms of remuneration (in Bowen’s words) “permit a rather subtle, yet a profitable form of wage discrimination.”¹³

When the magnitude and form of the noncash part of labor’s remuneration are a matter of governmental decision, the danger of the politically weak being sacrificed is very real. And sheer arbitrariness—a consequence of the workers’ preferences being ignored—is an even greater danger. Politicians are hardly likely to worry very much about the wantedness of the objectives purchased through the reduction of pecuniary wage income.

There are indications for instance that, in underdeveloped countries, progress toward higher material living standards is being slowed down seriously through the imposition of conditions of employment which might be appropriate for the affluent proletariats of the United States and Western Europe but not for such “backward” populations as have been unable yet to price their services to attract wage-multiplying assets, and provide the investment security necessary. What may be a wise composition of labor’s remuneration in highly industrialized regions can be a grave burden on peoples whose initial penury demands different priorities in purchases and in the form of productive effort. The influence of the International Labor Organization in this respect has probably been a major factor in maintaining the huge gap which has been observed to have arisen in the industrially backward countries between the real earning power of the emerging artisan class and the traditional agricultural and unskilled laboring class. The full incentives of market inducements to orderly modernization may have been lost through the failure to perceive that costly factory amenities are “paid for” by the workers who live under them. The profit motive to bid workers away from low-paid laboring jobs to relatively well-paid semiskilled and skilled jobs, under (for them) better working conditions, has almost certainly been weakened because too large a proportion of labor’s remuneration has been absorbed in environmental costs. That is, the “labor-cost mix” is not what appeals most to rural laborers. There is no suggestion here, of course, that the workers in countries which are beginning to industrialize should not make the fullest use of what the world has learned over the last two centuries about industrial health, safety and environmental considerations generally. Moreover, as such workers progress, the larger will be the proportionate share of noncash wages they may be expected to prefer. But their preferences (or the choice of benefits delegated to their trusted advisers) ought to be rational, in the sense that the full implications of any choice are among the determinants of that choice. And if they are wise, they will perceive among other things that it is in the interests of their competitors in the developed areas of the world represented by the ILO to advise or “educate” them in a manner which reduces their ability to compete and slows down their rate of material advancement.

There is another rather ominous feature of the growing proportion of labor’s remuneration which is coming to be received as “welfare” services. The contributors are increasingly tending to receive, not the actuarial value of their compulsory contributions to insurance or pension schemes, but benefits more or less adapted according to their “need.” Thus, not all sickness benefit payments are being made in proportion to an individual’s scale of contributions, as under “commercial” schemes. Certainly, any redistribution from high premium to low premium contributors for standard benefits, if voluntarily accepted by the former, may be regarded as laudable—just as would be a voluntary redistribution of the pecuniary earnings of the better-paid workers for the benefit of their less fortunate comrades. But no one ever argues explicitly that pension benefits should be based on “need,” while contributions should be based on earnings (“ability”). The traditional attitude of the higher-paid workers under typical labor-union ideologies hardly suggests that altruism—concern for the interest of their poorer comrades—can provide an explanation. Presumably, therefore, the development has been tolerated because the aggregate sum involved has so far been small, or because the more productive and higher-paid workers have not perceived a forced redistribution in which they have been the losers.

It may help us to view these questions in due perspective if we constantly remind ourselves that managements have no more right to be generous to the workers (with fringes or anything else) than the managements of stores have the right to be generous to their customers, or banks to be generous to borrowers with their depositors’ capital. (See p. 113.) All have the duty not to indulge in any form of sharp practice and to be strictly honest in their dealings. Managers are in the position of trustees in their relation to stockholders. Moreover, it is rather absurd to regard generosity on the part of one or other party to a bargain as a factor determining the terms of the bargain.¹⁴

For instance, in time of war, managements have often interpreted correctly the wishes of stockholders when they have paid honoraria to those of then-staff who have served in the armed forces. Sometimes, with the same justification, honoraria have been paid to amateur sportsmen who have attained prominence of which the firm has been proud (although that is often profitable personnel or publicity policy). When sheer misfortune has hit a member of the staff—particularly one who has served the firm for many years—managements have often rightly interpreted stockholders’ wishes in giving noncontractual financial assistance. And during inflation, with a similar justification, managements have been known to increase the pensions of former employees—victims of the monetary policy that the strike-threat system has made expedient. But even if we can assume that, in such circumstances, there is no ulterior motive for ex gratia payments—like the goodwill of the firm—this does not affect the issue raised here. In any realistic assessment of the nature of collective bargaining about the price of labor, the notion of generosity on either side ever entering into the picture can hardly find a place. When a corporation poses as “generous” to its workers, it reminds one of the sort of “generosity” implied when “free gifts” or “three for the price of two” are offered by a store.¹⁵

An economic system which develops under free market institutions is likely to give unstinting opportunity for expression of those “other-regarding” emotions and conations which are manifested in generosity and altruism. For contrary to what is usually assumed, avarice, greed and envy are aroused, and the sources of charitableness and generosity quenched, when people are allowed, by restraint of the right of substitution, or via voting-power under corrupt democracy, to enrich themselves at the expense of others. Benevolence and unobtrusive charity are characteristic of societies in which the relatively successful or fortunate feel secure from depredations (governmental or strike threat). But these virtues are expressed in the use made of individual incomes and not in the process of determining those incomes, that is, not when arriving at the value of the product of labor or the value of the services of assets. An understanding of this truth by those who presume to be the world’s moralists could, I sometimes think, work with unparalleled success toward achieving the ideals which they champion and we all accept.

The ethical issues are impressively treated in two recent books—Envy, by Helmut Schoeck,¹⁶ and The Modern Corporation and Social Responsibility, a debate between H. G. Manne and H. C. Wallich.¹⁷

NOTES

¹ We can regard leisure (including “paid vacations”) as a “fringe benefit,” but as having been purchased in a way which leaves a reduced compensation out of which other fringes can be acquired.

² There appear to have been other reasons for the recent trend toward a rise in fringe benefits. During the inflationary decades since World War II, direct wage-rate increases have at times been frowned upon, and entrepreneurial competition to retain or attract labor has tended therefore to take the form of nonpecuniary offers. Another special stimulus to nonpecuniary compensation has been due to pension contributions and the like being accorded specially favorable tax treatment.

³ Someone has pointed out that the conditions of cowsheds and stables generally have improved enormously over the century with no union pressures to bring about the improvement!

⁴ The courtesy of businessmen toward their staff and toward their clients is not hypocrisy, simply because they know that lack of courtesy would be harmful to them. Such relations still often lead to genuine friendships. And the inculcation of loyalty to the firms with which employees have wage contracts ought not to be deplored.

⁵ The circumstances envisaged are those which the economists describe as “externalities” (see pp. 272-273).

⁶ If the income withheld is more wisely used for the workers’s benefit than would have resulted from his own decisions, a strong argument can be made out for it. I discussed this difficult and controversial issue in Chapter 17 of my Economists and the Public (Jonathan Cape, 1936).

⁷ I say partly because I am not suggesting the absence of any enlightment about income disposal on the part of union officials.

⁸ But nonunion firms have often found it profitable to offer pension schemes and similar benefits, both as an aid to recruitment and as a method of maintaining stability of personnel,

⁹ We cannot of course talk of “ethical consensus” when governments seek to enrich majorities of voters at the expense of minorities of voters or the unenfranchised. See W. H, Hutt, Politically Impossible, . . .?, Part IV.

¹⁰ F. A. Harper, Why Wages Rise (Irvington-on-Hudson, N. Y.: Foundation for Economic Education, 1957), pp. 92-93.

¹¹ I have not read of any explicit “agreements” in which age as such (as distinct from seniority in the firm or industry) constitutes the basis for discrimination in lay-off.

¹² There are of course exceptions. The offer of what is called “tenure” in public service and university circles can be a particular kind of wage inducement.

¹³ William G. Bowen, The Wage-Price Issue: A Theoretical Analysis (Princeton: Princeton University Press, 1960), p. 96.

¹⁴ This is not to deny that an act of altruism may follow or accompany a bargain or that a voluntary transfer of income may be the sequel to or the accompaniment of a bargain. Nor does the assertion imply a denial that a gift may be tactfully hidden in the terms of a transaction.

¹⁵ On the question of generosity expressed by participants in a free market system, see p. 113.

¹⁶ Helmut Schoeck, Envy—A Theory of Social Behavior (New York; Harcourt, Brace and World, 1970).

¹⁷ H. G. Manne and H. C. Wallich, The Modern Corporation and Social Responsibility (Washington, D.C.: American Enterprise Institute, 1972).