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For all of these reasons, employers may offer fringe benefits as part of a compensation package and also for these reasons the wage-fringe tradeoff need not be equal to unity. An employer might be willing to offer more than one (present value) dollar of pension benefits in exchange for one dollar of wages if pension benefits reduce turnover costs. An employee might value that pension contribution at either more or less that its dollar cost depending on his or her demand for pensions relative to wages and the tax benefits of pensions relative to wages. Therefore estimation of the worker valuation of fringe benefits is not just an attempt to test or verify a theory predicting a one-for-one tradeoff (as is sometimes implied in the literature) but also to estimate the size of this tradeoff.
Since the expected impact of fringe benefits on job satisfaction is unclear, it is not surprising that past research is inconclusive. When included in typical estimates, the impact of fringe benefits on job satisfaction is rarely significant. In addition, the evidence mainly depends on cross-sectional comparisons, raising questions about potential biases. First, the impact of a particular fringe benefit on job satisfaction can be misleading if the worker has unmeasured individual specific determinants of job satisfaction. Indeed, we cannot assume that workers are randomly sorted into jobs but rather that they sort themselves into the jobs that suit their preferences. In addition, job satisfaction and fringe benefits may be simultaneously determined such that fringe benefits are endogenous in determining job satisfaction.
Thus the relationship between fringe benefits and job satisfaction has not been appropriately tested. Very little past research has isolated and examined fringe benefits as a primary determinant of job satisfaction, few studies have included as many fringe benefits as are available in the National Longitudinal Survey of Youth (NLSY) and none have...