Can Employee Benefits Ease the Effects of Nominal Wage Rigidity?

CAN EMPLOYEE BENEFITS EASE THE EFFECTS OF NOMINAL WAGE RIGIDITY?:
EVIDENCE FROM LABOR DISPUTES by Paul Oyer August 2005 ABSTRACT

Nominal wage rigidity presents a challenge to employers when market wages drop. In this paper, I consider the possibility that employer-provided benefits are not as rigid as wages and that benefits allow firms to build some flexibility into their compensation structure. I derive a simple model of firms using benefits as a hedge against decreases in nominal market wages when wages are downwardly rigid. I test the model using data on work stoppages from 1953-1977 and find results that are largely consistent with this justification for benefits. Most importantly, I show that labor disputes are much more likely to be related to benefits when inflation rates are low.

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