Question

Fringe benefits are a large component of total compensation. There is a puzzle as to why payments “in-kind” like fringe benefits prevail given the basic economic proposition that cash or money payments are more efficient than payments “in-kind”.
(a) Discuss why workers may prefer fringe benefits to cash wages at least for a portion of their compensation.
(b) Discuss why employers may prefer fringe benefits to cash wages for at least a portion of their compensation.

Answer 1

(a) Workers may prefer fringe benefits to cash wages as fringe benefits are benefits in kinds. Therefore,on these benefits tax will not be incurred. Hence, apart from the cash wages, fringe benefits help to give a mental peace to the workers. Medical insurance, education support are some of the fringe benefits. Without medical insurance, the workers will face a sudden expenditure on their savings. However, medical insurance gives them that relief. Therefore, workers prefer fringe benefits. When fringe benefits are not mixed with cash wages, then the workers have a better negotiating power. Hence, fringe benefits are beneficial to a worker.

(b) From an employer's perspective also a fringe benefit is better than cash wages. A company loses the returns from a worker when a worker cannot come to work due to illness. A fringe benefit of a medical insurance helps in this case. Dr nfe benefits gives the workers s mental relief, hence they are more engaged in their work than earlier. Fringe benefits amount to a lesser amount than cash wages as companies have tie ups with other medical insurance companies, or transport companies, or meal companies, etc.