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A Note on Wage Regressions and Benefits

Author

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  • Tommaso Tempesti

    (University of Massachusetts Lowell)

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.

Suggested Citation

  • Tommaso Tempesti, 2016. "A Note on Wage Regressions and Benefits," Economics Bulletin, AccessEcon, vol. 36(3), pages 1580-1594.
    • Handle: RePEc:ebl:ecbull:eb-16-00561
    as

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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • F1 - International Economics - - Trade

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