Why Wages Rise: 9. Losing Pay Through Fringe Benefits

Dr. Harper is a member of the staff of the Foundation for Economic Education.

      The previous article discussed the worth of a free hand in the spending of one’s own wage income. When you can’t use your income for things of your choice, its worth is lessened to you.
      It was shown how this applies to the costs of governing ourselves. The rise in taxes over the last half century has cut more and more into wages, absorbing about half of our increased capacity to produce. From a cost of three minutes out of each hour of work fifty years ago, taxes now take 19 minutes.
      The greatest opportunity now for a quick increase in the worth of wages is to reduce the cost of governing ourselves so that more of the wage can be kept. Then you can spend it for things of your own choice and preference among the multitude of things available—goods and services. A dollar saved this way is as good as a dollar earned by working harder.
      The present article deals with another aspect of free choice in the spending of wages, by which it is possible to raise the worth of wages even further.

The communists-socialists have a plan for society that goes like this: “From each according to his ability, to each according to his need.”

This communal blueprint is appealing enough on the surface. Each of us wants to do the best he can according to his ability. And who among us doesn’t yearn to have his needs fulfilled? So this slogan sounds like Heaven before the hereafter.

The barb in the bait lies concealed beneath the pleasant dreams of a utopia. For the brutal discipline of reality rules over hopes that can’t be hatched.

The catch is twofold. First, as a member of a communist-socialist society you shall not be allowed the privilege of pursuing the release of your abilities at a task which seems best to you. A central authority will decide this for you and for everyone else. He will do this in order to keep a workable ratio between the persons on the stage and in the audience at the opera; in order to have passengers who will ride the trains instead of all being engineers; in order to have someone who will take care of the sewage, and the like. The Commissioner of Opportunities to Work will command you to work at the job of his choice, not yours. You may neither strike nor quit nor change to another job more suited—as you see it—to your abilities.

Needs—In Whose Opinion?

The second catch in this slogan is that your official allotment “according to need” will have no necessary relationship to your hopes and expectations. For it is the central authority, not you, who decides on your needs. And so the Heaven of your dreams turns into a sorrowful reality. Even a child knows this important distinction, such as the difference between the soda he needs and the soda his father proclaims he doesn’t need.

Under communism, the central authority decides whether it is bread or cake you “need.” If he thinks you need boogie-woogie instead of Beethoven music, or vice versa, that is what you will get. The education he decides you need will be acutely attuned to an understanding of the reason why your welfare is supposed to depend on his staying in power. All these “needs” will be decided with a cold, inhuman arbitrariness. Since the Commissar of the Peoples’ Needs never met you—probably doesn’t even know you exist—his decisions can’t possibly come even close to your version of your needs.

And even though the Commissar chanced to know your wishes, his job is to ration acutely scarce things, labeling them “your needs.” Production is low under such a system. And whatever its amount, even with all his power he can’t provide for any needs beyond what is produced, less a heavy handling fee.

Under the communist regime there is another side, too, to this matter of providing for your needs. He will also prohibit you from having what he thinks you don’t need. This, in fact, becomes a main part of his task under the poverty of communism.

A punster once remarked that life in a communist country means that everything not compulsory is forbidden. And in like manner, the communist-socialist slogan should probably be reworded as follows: “From each according to his ability, and keep from each what he does not need.”

Complete and thorough communism has been rare in the world because it is a highly perishable system. Rebellion constantly arises out of the biological, mental, and spiritual nature of man. So the dictator’s policies must be “realistic,” i.e., they must be moderate enough to enable him to stay in power. A certain amount of freedom of choice must be allowed.

The less-than-complete patterns of communism which exist in various nations go by another name. They have become known as Welfare States.

We need not look afar to some foreign country or ancient society to find this communist policy in operation, in a lesser degree. We have it in our own nation, in widespread forms and instances. Probably each of us is a victim of some of this same type of authoritarian control that we criticize severely when we see it being practiced in Russia or Britain or elsewhere. So perhaps a little soul-searching is in order. .

We need especially to review the growing pattern of wage payments which incorporates some of the same idea m “according to need.” There is growing up in our midst what might be called corporate welfare states in miniature, or union welfare states. Their effect on the real worth of wages is what will mainly concern us here.

The Total Wage Concept

In order to see the nature of these miniature welfare states in relation to wages, it is first necessary to recall that there is no way to consume this year something to be produced next year or the year after. This remains a simple truth even in an economy like our own where some persons are employed by others and paid with money wages.

Wages have no worth except as one can buy with them something he wants, including the investment of savings. So no matter what the rate of pay or the form of payment, there is no way to pay wages making it possible to have something this year that is not to be produced until next year or the year after.1

The simple economic law that wages follow can be seen most clearly by the life of an isolated pioneer. He has what he can produce, and no more. His “wages” are limited by the amount of his production.

What is produced is likewise the “total wage” of an isolated communal society, or of a nation having a balance in external trade. Production rules the wage limit even in a society otherwise controlled by an iron-fisted communal dictator.

No matter who cuts the economic pie, it can’t be cut into pieces which combine to a total that is more than itself. If cut so that one piece is larger, another piece or pieces must be correspondingly smaller. The only way one piece can be made larger without penalizing the others is by increasing the size of the pie—increasing productivity and total output.2

But we are not here discussing such matters. We are, instead, starting with the assumption that this problem of dividing the total of production in a given year has already been resolved satisfactorily for the individuals involved.

Your Share of the Pie

Now let us look at your share of the pie, the part you have produced. It is yours by rights, because you have produced it. And your employer recognizes and accepts it as yours.

He will let you take what you produce in that exact form, if you so desire. But you don’t. Perhaps you make castings for trucks; you can’t eat them or wear them yourself. Or you may make caskets; you surely don’t want them—at least not more than one, and not yet. Or perhaps you teach; what teacher wants to be paid a wage composed of listening to his own teaching?

So you want to be paid the money equivalent of what you produce, not what you produce in fact and in kind. You do not want to peddle the products you make, yourself. You want them to be sold by the specialized and efficient sales setup of your employer, which is much to your advantage. Then the sales price, in effect, becomes your wage.

Let us say that last year you produced products of the average amount for a United States family—about $6,000 worth. Taxes took about $2,000, leaving $4,000 net after all types of taxes.3 This money can be spent by you for whatever you want most.

What you choose to buy is not at all the same as the choices of the man who works next to you in the same plant. This can be seen by comparing notes with him as to what, precisely, each of you did with your last pay checks—every cent, even down to the brand of bread you prefer or where you went on your vacation. If any doubt still remains, compare the choices of hats and dresses your wives bought with some of the money. The techniques of mass production and standardized assembly lines do not carry over into what employees want to buy with their wages.

Suppose I take your $4,000 and spend it for you. This means that I shall spend it for what I think you need, not for what you think you need. In other words, I’ll probably spend it for the same things I would buy for myself if it were mine, because that is what I am most likely to consider to be your greatest need. I’ll have to deduct a sort of commission for my trouble, of course.

What does your $4,000 become worth to you if I handle it that way? Remember that I am going to subtract a commission for handling its spending for you; then with what is left, what would you pay for what I select for you? The resulting figure—what you would pay for it—is all that your $4,000 wage would be worth to you under such a plan. That figure can be compared with your $4,000, which you might have taken yourself to spend for your greatest needs as you saw them rather than to give it to me to spend for you.

Assume, for instance, that you say my purchases are worth only $3,000 to you. This would mean that a wage of only $3,000 to be spent by you is as acceptable as $4,000 which I spend for you. There would have been a $1,000 loss, or one-fourth of your $4,000 wage. It means that the real worth of your wage became only $3,000, instead of the nominal figure of $4,000. Your share of the pie—the part due you because of your having produced that much—would have shrunk by one-fourth.

Fringe Benefits

Fringe benefits, as they are called by prevailing jargon, are precisely of this sort. They have been a major objective of union leadership, and have been increasing more and more over the years. The term has even been adopted by employers, journalists, and essentially everyone else. Yet the term “benefit” implies the opposite of the fact, in most such instances.

What, really, are fringe benefits? They are of two types: One type of “fringe benefit” is the spreading of your pay, which was earned while working, over periods when you do not work. Let us say that you actually work on the job a total of 1,800 hours in a year—an eight-hour day, five days a week, forty-five weeks a year. You might be paid your $4,000 of yearly earnings after taxes in one check at the end of the year; or in forty-fifths at the end of each week you actually work; or some other similar way. Or, if you prefer, the total yearly amount could be paid in twelfths at the end of each month, or in twenty-sixths at the end of each fortnight, or in fifty-seconds at the end of each week—including the weeks and days when you did not work. However it is done, the total will still be $4,000 after taxes.

Some of your earnings may even be paid to you in your old age, after you have retired.

The way you are paid, in this sense, is a benefit to you only as it may be a convenience to receive your $4,000 at certain times rather than at others. It has nothing to do with how much you are paid. It is not a way to get more pay than you have earned—more pay than the worth of what you have produced—and so it is not really a benefit at all, in this sense.

The other type of so-called fringe benefit includes all sorts of things which became substituted for money pay, which you may spend for things of your own choice. Instead of getting your entire $4,000 as a money wage, you may get some of it in the form of specified goods or presumed services. All sorts of things become substituted for money pay. They range all the way from better toilet facilities in the plant to golf courses for members of the families of employees—per-haps even help in building a church of some denomination in the community. It may be more company picnics, or a Christmas party, or insurance of one sort or another, or a pension for old age all sorts of things.

Sometimes these “fringe benefits” are the result of employee pressure, either through the union or without any union. But often they are initiated by management; a “company plan” is put into effect.

However they come about, “fringe benefits” of this type have one aspect in common. In each instance its cost comes out of the money due you as pay—out of your $4,000. It reduces the amount left to be paid to you as a cash wage, that you may spend on your greatest need as you see it. It is something that someone else thinks you need.

Fringe Detriments

Most schemes of this sort are not really benefits at all. Employees would be better off, by their standards of need, if they could have the money instead. Then they could buy something worth more to them than any Common package, more than any uniform communized “need” that could be devised. Perhaps you don’t want any of your $4,000 spent on a golf course because you do not want to play golf. Perhaps you do not want part of your $4,000 used to help build a church of a faith that is not yours. And similarly for other so-called fringe benefits, imposed alike on all employees. You may not want them at all in your current budget, or if you do want them you may not want them under this plan because you may be able to make a better deal elsewhere.

To illustrate, let us say that for every dollar taken out of your income for a “fringe benefit” by someone else’s idea of your need, you get something worth only 75 cents to you. Then it would have been worth one-third more to you to have gotten the dollar instead—for a dollar’s worth of purchases as you appraise them. For anyone to speak of a loss of 25 cents out of the dollar as a benefit is a strange use of the word, indeed. Rather, it is a negative fringe benefit.

My dictionary says that the opposite of a benefit is a detriment. So instead of being a fringe benefit, these kinds of things are really fringe detriments. Even then, they are not on the fringe of your welfare; they are as much at the heart of your welfare as any other dollar of your pay.

It is common for these so-called fringe benefits of all types to amount to as much as 10 to 20 per cent of the pay in many corporations now. This amount should be a major item of concern among employees, since it is both large and increasing.

Little Welfare States

A friend of mine speaks of them as little, corporate welfare states. And, to be sure, they are just that—if we mean by a welfare state the centrally controlled spending of the people’s income for what those in control decide is the need of the people.

A small welfare state is perhaps better than a large one, of course. And it is best to have it where one may move away from its grasp as easily as possible. But an evil small in size and where one can move away from it is still an evil, not a good. It is still of the essence of communism – socialism, wherever and to whatever extent it operates.

So in conclusion, I would say that one way to raise wages is to repeal all these fringe detriments and to set up no new ones; to return full choice, in the spending of the worth of what he has produced, to each individual employee; to give him his wage in the form of money, to be spent on what he most considers to be his need and wherever he can get the best deal.

If several persons want exactly what is offered in the package of fringe detriments, they may still obtain them in the market for goods and services. They may still get the full worth of their incomes in that way, without imposing their desires on all other employees as a “fringe benefit.” It is all the others who do not get their dollar’s worth. Their income dollar becomes clipped by these fringe detriment schemes, in a manner like the clipping of the coins by the rulers in days of old—for their personal gain.

The worth of wages can in this way be raised at once, anywhere employers and employees decide to do so. It need not await the slow process of increasing productivity. In fact, this is necessary if we are to gain the full benefits possible under our increased capacity to produce.

And as a final point, these schemes of so-called fringe benefits often are a serious threat to our continued progress. Ostensibly their purpose is to reduce turnover of labor and stabilize employment. But they tend to freeze a worker in his job. He does not leave for a more productive job because he would then lose his seniority status and the “accumulated benefits” which he cannot take with him. So he keeps his “security,” which the union or the company allows him to have only if he stays where he is. He does not follow opportunity where it leads. “Once a coal miner, always a coal miner,” is its effect. This sort of freezing tends back toward the old European caste system, and could bring an end to the traditional American growth of welfare and increasing wages.

So “fringe benefits,” rather than coming from pie in the sky, come out of wages—out of what could be paid as money wages. And furthermore, they comprise a serious threat to our progress. []



The Mobility of Labor

Some persons want to abandon the competitive system of bargaining because they say there is not “perfect” competition. They fear for the workmen, because they say there is not a “perfect” mobility of labor. And it certainly is true that some persons do not move as quickly as do others in response to an opportunity for higher wages. Home and family and church and community and all sorts of ties influence any decision to move. There may be a loyalty to one’s present job which isn’t measurable in dollars and cents. And there may be other barriers to mobility, such as seniority privileges and tied-up pension rights, which in many instances have grown out of a perversion of the free market. Both management and labor have been guilty of thus abandoning the market method of wage determination, and now the critics want to discard the competitive system completely because of those perversions. They forget that the market system, even in the absence of perfect mobility has afforded individuals in America a greater freedom to move than others have ever known under any other system. Some of those other systems allow the “workers” no choice at all.

Paul L. Poirot, Bargaining

Foot Notes

1. See “Why Wages Rise: 2. Productivity,” The Freeman, April 1956, pp. 36-39.

2. See “Why Wages Rise: 3. Dividing the Pie,” The Freeman, May 1956, pp. 27-32.

3. What you can spend is the net after paying taxes, which last year took about one-third of the pay from each hour of work, in both direct and indirect taxes. The Freeman, October 1956, pp. 34-39.

Read the next part of this series here