The Economics of Non-Wage Labour Costs (Routledge Revivals)

Bob Hart

• Publisher: Routledge
• Year: 2010
• eBook ISBN: 9781136921698
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

Throughout the OECD, 30% of the average firm's total labour costs comprises items which are other than direct remuneration. This reissue, first published in 1984, focuses upon these non-wage labour costs, which include; fringe-benefit payments, obligatory social-welfare contributions, holiday entitlements and expenditures on recruitment and training, seeking to make amends for the woeful lack of consideration given to these important factors in previous wage literature.

The book focuses on two major areas of enquiry: firstly, the costs for the cyclical behaviour of employment, and secondly, the role of average working hours per employee in the firm's overall allocation of labour services. The author begins with an empirical survey and costs breakdown, followed by extensive data on Japan, the UK, the USA and West Germany. The ensuing analysis considers the question as to why firms incur the various non-wages, and a comparative static factor demand model is constructed, which accommodates the major cost items.

1
Introduction

Non-wage labour costs (NWLCs) are those categories of the firm’s total labour costs that comprise other than direct remuneration. They include fringe benefit payments, obligatory social welfare contributions, expenditures on recruitment and training as well as many other special cost items. Taken together, they form a very significant part of the average firm’s total expenditure on labour. Table 1.1 shows, for all industries, the ratio of NWLCs to total labour costs in eight OECD countries from 1966 to 1981. In 1981, they averaged 25–40 per cent of the total. Further, while the ratios have increased somewhat since the mid-1960s, it is clear that throughout this period NWLCs averaged roughly 30 per cent of total labour costs for all countries.

Major interest in the influence of non-wage labour costs on labour market behaviour began in the early 1960s with the advent of important developments in human capital theory. This work concentrated primarily on investigating the effects of recruitment and training investments on the firm’s cyclical demand for workers. Later contributions extended both the range of costs included in general labour market analysis as well as their scope of influence. Three explanations help to account for this somewhat late development of the subject area. First, NWLCs have a relatively short history of constituting a

Table 1.1 Non-wage labour costs as a percentage of total labour costs: eight OECD countries, 1966–81

major labour cost consideration to the firm. In most OECD countries, the foundations of social welfare programmes were not laid down until the Great Depression, and the associated payroll taxes on firms did not gain real significance until the postwar period (see, for example, US Chamber of Commerce, 1981).¹ Likewise, compensation in the form of fringe benefits and paid non-work activity did not feature as major labour cost items until after the early 1950s.² Second, statistical information on NWLCs has been, and continues to be, decidedly inferior to that on wages and other key labour market variables. However, particularly since the mid-1960s, a much wider and detailed systematic national coverage of the costs has become available, particularly in Europe and Japan. Third, it required two theoretical breakthroughs, both in the 1960s, before it was generally appreciated that NWLCs play a unique role in the firm’s labour market behaviour and thus require special attention in their own right. It is largely on the ramifications of these two developments that this book concentrates.

The first of these breakthroughs was achieved, independently, by Oi (1962) and Becker (1964), who concentrated their attention on those non-wage labour costs that represent human capital investments by the firm. They were concerned primarily with the NWLCs involved in hiring, firing and training workers, but their analyses also offered explanations for the payment of certain types of private fringe benefits. The work generalised the standard classical theory of employment through its emphasis on the optimising firm’s behaviour in the face of the fact that these types of NWLC, unlike wages, are largely fixed in the short run. Under the profit-maximising condition, treating labour as a quasi-fixed rather than as a variable factor of production has fundamental implications for the behaviour of the labour input variable, particularly in the event of unanticipated changes in product demand. Oi and Becker’s contributions laid the basic foundations for a body of related work that investigated the cyclical relationships among employment, output and wages.

The second development was carried out by Rosen (1968), who established that differentiating between fixed and variable labour costs necessitated treating labour sevices as a function of both the stock of workers and its rate of utilisation (as measured by the average hours worked per worker). Again, the principal results here hinge on the fact that certain non-wages are per-worker costs. However, this was by no means a trivial extension to Oi and Becker since it established beyond doubt that studying labour market phenomena associated with changes in the labour input without differentiating between workers and hours per worker can produce seriously misleading inferences and results.

Table 1.2 Changes in employment and average hours in Europe, Japan and the USA, 1974–7a

It is worth emphasising the importance of the workers-hours distinction, if only to defend the fact that it receives particularly strong attention throughout Chapters 5–11 of this text. Table 1.2 shows the changes (measured as deviations from trend) in manufacturing employment and average hours, in Europe, Japan and the USA for the periods during and immediately following the 1974/5 recession. From these figures it is clear that analysing the labour response only in terms of employment would misrepresent both the size and nature of the recessionary impact. In all countries, though particularly in Europe and Japan, the magnitude of the hours-adjustment response relative to that of employment is such that to concentrate attention solely on the latter would lead to a serious underestimate of the total labour response. Note also that the timing of the hours adjustment is quite different from that of employment. In general, hours changes appear to lead employment changes both in the initial economic downturn and in the subsequent upturn. Hall (1980) has broken down the labour effects of output changes (measured as percentage deviation from trend) in this and the 1970/1 recession in the USA and has shown that the decrease in work effort (output per hour and hours per worker) is equal in importance to decreases in employment and participation.

While, as will be seen later, the role of certain categories of NWLCs is consistent with the picture portrayed in Table 1.2, it is not the intention here to investigate actual causality. Rather, in support of the approach adopted in this book, the example is used to endorse Hall’s claim that ‘determination of the intensity of work and hours on the job is an issue just as important as determination of the total number of people at work or in the labor force’ (Hall, 1980, p. 96).

Extensions of the Oi, Becker and Rosen work helped to broaden the scope of interest in non-wage labour costs. Three important examples are as follows. The conceptual parallel between the stock and utilisation of labour on the one hand and the capital stock and capacity utilisation on the other was brought to the fore by Nadiri and Rosen (1969). In particular, they achieved a notable advance in production and factor demand theory by investigating the full interrelatedness of the two dimensions of both factors. Ehrenberg (1971) extended the labour demand theory (and the accompanying econometric estimation) associated with NWLCs by broadening both the range of costs included in the system and the number of other related economic variables. A generalisation of the Oi/Becker framework was presented by Hashimoto (1975 and later work) to allow for the possibility of price-adjustment, as well as quantity-adjustment, reactions to unanticipated falls in product demand. These and other contributions are discussed in later chapters.

Essentially, the text falls into two, albeit highly related, parts. The structure and quantitative importance of non-wage labour costs are discussed in Chapters 2 and 3 with reference to published data on four of the countries in Table 1.1. These are Japan, the UK, the USA and West Germany (FRG). It should be emphasised that the prime aim of these two chapters is to provide a general statistical background to some of the topics of interest in later chapters. Only limited reference is made to the particular attributes of individual countries that help to explain a given national structure of costs. Chapters 4–10 then concentrate on the labour market analysis of NWLCs. In general, they deal both with the reasons why firms incur such costs and, more importantly, with the effects of the costs on firms’ labour market behaviour, particularly in the areas of employment and wage determination. Chapter 11 presents some brief policy conclusions.

While the orientation of all chapters is towards non-wages as labour costs to the firm, this does not mean that the effects of non-wages on workers, who both receive and contribute to non-wage benefits, are ignored. In the chapters dealing with wage determination and unemployment, in particular, it is essential to accommodate supplyside issues. However, the overall emphasis is on costs rather than benefits. Further, it should be underlined that the approach adopted highlights short- rather than long-term effects. This helps to bring out the potential importance of changes in hours of work as an adjustment mode. It also necessitates the development of the firm’s likely responses to payroll tax changes beyond those concerned with tax shifting.

NOTES

1 Little long-run data series on non-wage costs exist for OECD countries. However, the US Chamber of Commerce has systematically collected information on employer contributions to employee benefits in company surveys conducted since the late 1940s. The following table presents estimates for four postwar periods as well as for 1929. The estimates in the table are weighted more towards smaller companies than in the Chamber’s regular surveys and also include rather more industries. Both factors serve to reduce the estimated benefit size relative to the regular surveys. However, they give an accurate representation of the main trends.

Estimated employee benefits as percentage of wages and salaries in the total US economy, 1929–79

Thus in 1979, legally required company payments as a proportion of wages and salaries had increased ten-fold from 1929 and almost three-fold from 1951.

2 Again, some evidence to support this, particularly in the case of fringe benefits, is provided by the US figures in the table in note 1.

REFERENCES

Becker, G.S. (1964), Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, New York, NY: National Bureau of Economic Research.

Capdevielle, P. and D.Alvarez (1981), ‘International comparisons of productivity and labor costs’, Monthly Labor Review, 104 (12).

Ehrenberg, R.G. (1971), Fringe Benefits and Overtime Behavior, Massachusetts: Heath & Co.

Hall, R.E. (1980), ‘Employment fluctuations and wage rigidity’, Brookings Papers on Economic Activity, 1, 91–124.

Hashimoto, M. (1975), ‘Wage reduction, unemployment and specific human capital’, Economic Inquiry, 13, 485–504.

Nadiri, M.I. and S.Rosen (1969), ‘Interrelated factor demand functions’, American Economic Review, 59, 457–471.

Oi, W. (1962), ‘Labour as a quasi-fixed factor’, Journal of Political Economy, 70, 538–555.

Rosen, S. (1968), ‘Short-run employment variation on class-I railroads in the US, 1947–1963’, Econometrica, 36, 511–529.

US Chamber of Commerce (1981), Employee Benefits Historical Data, 1951–1979, Washington, DC: Chamber of Commerce of the United States.

2
The Structure of Non-Wage Labour Costs: Definitions and Distinctions

This chapter has two main objectives. First, it describes the individual cost items to the firm that together constitute non-wage labour costs. The items are ordered into a set ...

Table of contents

• Contents
• Acknowledgements
• Preface
• 1 Introduction
• 2 The Structure of Non-Wage Labour Costs: Definitions and Distinctions
• 3 The Quantitative Importance of Non-Wage Labour Costs
• 4 Why Do Firms Incur Such Costs?
• 5 Factor Substitution and Non-Wage Labour Costs
• 6 Cyclical Employment Effects
• 7 Wage Inflation and Wage Rigidities
• 8 Unemployment Insurance, Other Obligatory Social Welfare Contributions and Unemployment
• 9 Worksharing and Non-Wage Labour Costs
• 10 Fringe Benefit Payments
• 11 Should Governments Attempt to Reduce Non-Wage Labour Costs?
• Index