Shift to Benefits Helps Explain Sluggish Wage Growth

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U.S. employers, slow to reward workers with higher pay, have been quicker in recent years to offer signing bonuses, more paid time off and other perks.

The move toward benefits over pay provides a few clues that help explain a chief mystery of the current expansion: the unusually sluggish growth in wages.

Some of the move toward benefits reflects a workforce that puts a high value on flexibility, health insurance, time off and other things besides wages.

But the shift also highlights the fragility of an expansion in which employers remain hesitant to commit to higher wages and are turning instead to more revocable perks. That could have broader repercussions if consumers aren’t able to tap bigger paychecks and boost their spending.

The share of worker compensation that comes in the form of wages or salaries has slipped over the past decade, with the decline accelerating since the recession ended. In the second quarter, 31% of total compensation came in the form of benefits such as vacation time, health insurance and bonuses, up from 29% a decade earlier.

“It’s a structural shift that is going on,” said Andrew Chamberlain, chief economist at recruiting website Glassdoor.com. “Across the labor market, it’s pretty significant shift of dollars from wages to benefits.”

Companies began offering health insurance to skirt wage controls during World War II. Now they are getting more creative, offering gym memberships, cappuccino machines, free cellphones and dog-friendly workplaces.

Average hourly wages have grown slowly since the end of the recession in mid-2009, advancing at a pace of about 2% annually or about 12% since the expansion began, despite steady job creation. In the 20 years before the most recent recession, hourly earnings grew, on average, better than 3% annually. Weak wage growth has been blamed for a wide range of soft spots in the economy, including uneven consumer spending, historically low inflation and many renters’ inability to purchase homes.

Benefits, meanwhile, have increased at a slightly faster clip, 15% since the expansion began. That’s actually a continuation of a much longer trend. Since 2001, benefits increased nearly 60%, while wages advanced 40%.

The shift at least partially reflects employees’ desires. Time off and perks like subsidized commuting costs and flexible schedules rank high on worker wish lists, according to surveys by Robert Half, a staffing service for various professional fields.

There are also tax implications for higher-income earners. Many benefits, including health insurance, are generally not taxed, but wages are.

“If a $10 lunch is tax-free, it can be the same as giving $20 in cash to workers,” said Mr. Chamberlain.

But under the Affordable Care Act, tax-free health insurance is slated to change. The so-called Cadillac Tax would impose a levy on generous employer health plans in 2018. That’s already causing some employers to consider reducing benefits or blocking workers from putting money into tax-free health-savings accounts.

Democratic presidential candidates Hillary Clinton and Bernie Sanders both favor repealing that part of President Barack Obama’s signature health-care law.

The increasing reliance on benefits also may reflect a shifting makeup of the workforce. Employment in management and professional fields, including doctors, lawyers and engineers, grew by 7.3% from 2009 to 2014. A smaller share of compensation for those workers, 69%, comes from wages and salaries.

In contrast, the number working in service occupations, including waiters and home-health-care aides, grew more slowly, up 5.1% during the five-year span. A higher share of compensation for those workers, 76%, came in the form of wages.

From a company’s perspective, tilting compensation toward benefits can make sense. It’s often quicker and easier to offer benefits, like a signing bonus, than it is to restructure salaries, a process that can take a lengthy review and then ripple across a company’s pay structure, said Ryan Sutton, the Boston-based district president for Robert Half.

Another potential factor in the shift toward benefits: Many companies were quick to cut them during the recession. For example, some stopped matching 401(k) contributions rather than cut salaries.

“The way that employees react to things, it is softer and easier to cut benefits than to cut wages and salaries,” said Linda Barrington, executive director of Cornell University’s Institute for Compensation Studies.

Today, companies are caught in a different paradox. In some industries, they are struggling to find workers in a tightening labor market. The unemployment rate, at 5.1% in September, is at its lowest level since 2008. But firms still remain wary about raising wages to attract and retain workers, doubting the durability of the economic expansion amid global headwinds and finicky consumer demand.

If the economy continues to heal and the labor market tightens further, it may be difficult for employers to shift even more toward the benefits side of the ledger, and bigger raises already could be happening: Wages grew at a slightly faster pace than benefits in the third quarter, the Labor Department said Friday.

Eric Morath, Jeffrey Sparshott

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