A Note on Wage Regressions and Benefits

Tommaso Tempesti

Economics Bulletin, 2016, vol. 36, issue 3, 1580-1594

Abstract: In economics it is common to study how a certain policy affects the compensation that firms are willing to pay to their workers. To this end, many papers use a regression with the log of wage as dependent variable. However, wages are only a component of compensation as non-legally required benefits now amount to more than 23% of compensation in the United States. I show that, because of the presence of benefits, the effect of a policy on wages may be different from the effect of that policy on compensation. If so, the wage regression, even if it correctly estimates the effect of a policy on wages, may not correctly estimate the effect of the policy on compensation. I use a simple model of utility maximization to derive an expression for the bias of the wage regressions. I then use that expression to quantify the bias as a function of the model's parameter values. I conclude suggesting possible avenues to address this issue in future empirical work.

Keywords: Fringe Benefits; Compensation; Bias of Log Wage Regressions; Policy Evaluation. (search for similar items in EconPapers)
JEL-codes: F1 J3 (search for similar items in EconPapers)
Date: 2016-08-16
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