Pensions and Wage Premia

In this paper we use that the theory of compensating differentials to identify sources of heterogeneity in firms' costs of providing fringe benefits and hence heterogeneity in the magnitude of the compensating differential. We estimate the relationship between pensions and wages controlling for variations in the size of the compensating differential related to firm size or the presence of a union. Both firm size and unionism are commonly associated with the payment of wage premia and/or the presence of market power where the costs of fringe benefits to the firm may be less. Our results are consistent with these a priori expectations and suggest that the magnitude of the compensating differential is significantly higher in nonunion and in small firms.