What are employer-paid employee benefits? The list is long and varied—time off (vacations, holidays, sick leave), supplemental pay (bonuses, stock options, subsidized lunches, etc.), insurance (health, life, disability, etc.), retirement (pensions, thrift plans, defined benefit plans, etc.), government mandated benefits (social security, Medicare, unemployment compensation and workers compensation) and even climbing walls and napping pods (Google).

As time goes on, employees have tried to shift more and more of their benefit costs to their employers. Does it work? What are the effects of such actions on employee money wages and on employees’ full compensation—wages plus benefits. Let’s see.

Suppose that for each $1 an employee earns, their employer must pay them t percent in employee benefits. Example: If workers earn $20 an hour and t = .15, then their employer must pay them $3 = (.15)*$20 in benefits. The worker’s total hourly cost to the firm is then W(1+t) = $23.

Suppose that for each $1 an employee earns they also receive benefits that they value at b percent of wages. Example: If employees are paid $20 an hour in cash and b = .15, then their employer is paying them benefits that they value at $3 =$20(.15). The workers total compensation—as seen by them—is then W(1+b) = $23.

Important note: The employer cost of employee benefits does not have to be the same as the value to the employee of employer-provided benefits. Something could be lost or gained in the exchange. Because of that, we must let b and t be different variables in the analysis.

Suppose that the demand for workers is given by the equation

Q_D = 40 – W(1+t)

and the supply of workers is given by

Q_S = -10 + W(1+b).

What is the equilibrium W and W(1+b)?

W(1+b) is the worker’s full compensation, from their perspective, and that’s what we need to focus on to see whether “employer-paid” benefits actually benefit workers after money wages (W) adjust to the change in worker supply and demand caused by the t and b scheme. We also need to see what happens to W – money wages – when the payment of worker benefits is forced onto firms. Do wages rise or fall when firms are taxed t percent on every $1 of wages and employees receive b percent in benefits on every $1 of wages?

Fill in the below table.

t	b	W	W(1+b)	W(1+t)	bW	tW	Q	Employee's Surplus	Employer's Surplus
0	0
0.10	0.10
0.25	0.25
0.35	0.25
0.25	0.35