List of practice Questions

Although economic analysis of collective bargaining has traditionally focused on wages, recent studies have increasingly focused on the effects of unionization on fringe benefits such as pen- sions and health insurance. Because the costs of providing fringe benefits are tax deductible for employers, fringe benefits are effectively subsidized by the government. This tax treatment creates an incentive for employers to increase the proportion of employee compensation that is paid in the form of fringe benefits. However, not all workers value fringe benefits equally. Since the value that workers place on fringe benefits is likely to rise with their income (because the tax savings associated with fringe benefits increase with income), higher-income workers are likely to prefer a greater proportion of their compensation in the form of fringe benefits than are lower-income workers. Unions, which typically represent lower-income workers, should therefore be expected to oppose the substitution of fringe benefits for wages. However, unions often support such substitutions. One explanation for this puzzling behavior is that unions take into account the preferences not just of current members but also of potential members, who are typically younger and higher-income than current members. Another explanation is that unions are willing to accept lower wages in exchange for fringe benefits because fringe benefits help to retain workers and reduce labor turnover, thereby increasing the union’s bargaining power.