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Tommaso Tempesti
''A Note on Wage Regressions and Benefits''
( 2016, Vol. 36 No.3 )
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.
JEL: J3 - Wages, Compensation, and Labor Costs: General
F1 - Trade: General
Manuscript Received : Aug 08 2016 Manuscript Accepted : Aug 16 2016

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