A friend of mine, recently employed, told me that members of the firm he works for are entitled to a discount on certain items in particular stores. He had just purchased a very expensive shirt at a large discount.
Wouldn’t everyone be as well off, and nobody worse off, if the money spent on discounts was just translated into higher wages? Not quite. As a strategy, this allows firms to reduce their wage costs by identifying workers who are sensitive to pay.
It is quite clear why businesses would want the firm to promote their goods and services. But given the scale of discount, it is likely that there is some payment by the firm in exchange for the special price.
It may be explained as tax evasion. Since these perks are so small, they would not be declared for tax purposes. Up until the revision of tax law in Ireland, this was why company cars were so ubiquitous.
The economist Richard Thaler explained job perks by considering them as gifts that the employer would really like, but whom circumstances might preclude from purchasing.
For example, there might be pressure on a businessman with a family not to spend money on a luxury car. But he would be much happier if the company (against his wishes) bought him a BMW and he had no choice in the matter. Some of the perks enjoyed by my friend might fall into this category.
More likely, the firm sees an opportunity to engage in pay discrimination. Different workers will be variously inclined to seize the discount. The most economical will do so, those who are sensitive to price and therefore pay.
Other employees may not be as bothered to base their shopping on the discounts. They’re not as sensitive to price and pay, so they won’t bother seeking out the discounted wares.
Thus, the cost suffered by the company for the perk only arises from the price sensitive consumers and workers. There’s no cost at all to extending the discount to workers that don’t use it. This allows the company to have a two-tier pay system.
When faced with workers that have different reservation wages, the company wants them to do the job for the least pay possible. Translate wages into perks, and you maintain the high wage (for the people that want it, and who exploit the discount) but without having to pay the same pay to everyone.
The company can identify workers who are not sensitive to salary, and pay them less. It’s just the market at work.
© The Free Marketeer 2009