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November 27, 2006

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Cory Hojka

One thing I'd question when comparing multiple benefits packages is should it be based on what is offered or utilized? For example, I'm under the impression that law firms can offer all sorts of benefits with the full knowledge that many will be quite underutilized. The reason is that the fear of underperforming relative to one's co-workers will drive people to avoid using them. Thus, a firm or some similar industry can likely offer the moon without much fear that such benefits will actually be used.

If we separate benefits into those that are utilized versus those that are not, I wouldn't be surprised that with the later that we would still see considerable diversity. Real benefits could likely conform to an industry standard while the disinclination of workers to utilize other benefits might allow employers to offer all sorts of wacky packages that risk little chance of actually being used.

Frank

Only for the sake of nitpicking:
You might reconsider citing 'signaling theory', which involves asymmetric information. I imagine the contracts are quite transparent. What do these workers want to know that is 'signaled' by these benefits, but not indicated explicitly? Corporate culture? Future utilization of the benefits is not a candidate, of course.

Also, isn't the dependence of "political change" on the support of "important interest groups" a truism? As far as the three closing points go, I wonder if
(i) you've confused adverse selection with attrition; churn does not suggest a bad haul unless you're taking into account relationship-specific investments; the latter cannot be too large a factor if the fields you're interested in can be outsourced to freelancers
(ii) the necessity of those benefits is obvious from the demand for them; and
(iii) the lo-hi contrast has always been there, and if there has been any political backlash involving the use or abuse of freelancers at all.

saul levmore

Thank you for the comments. The signaling I have in mind is that the firm with high parental benefits "signals" that it is and will be an employer friendly to parents. It is more likely than most to accommodate with short term leaves, or to be flexible when a parent needs to run out of the office when there is an emergency. The signal is credible because the expensive parental leave policy shows a willingness to invest in such employees and shows that it is likely that over time more parents will be at the firm, or perhaps more non-parents who are sympathetic to large expenditures on other parents, and these members seem much more likely to be supportive of co-workers with child-related emergencies. If we insist on seeing an asymmetry, it is the knowledge of how those already at the firm are likely to react to future workplace issues.

As for the high-low benefits equilibrium and the question of whether it is sustainable, I did not mean a national political backlash, but rather a market reaction. If there is adverse selection (people likely to have many children go to the firm with high benefits, and they guess correctly) or attrition (people who see they are unlikely to have children defect because they do not wish to "pay" for the benefit enjoyed by co-workers), eventually the benefit will be very expensive on a per-worker basis, or will simply fail to provide insurance because it will be priced at its delivery cost.

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