Employer-provided health insurance shields workers from the cost of care and the cost of insurance, distorting the market for health care in two ways. Large premium increases also take money that could have gone to wages. In spite of these harms, most medium-sized and large employers provided insurance to their employees even before federal mandates. Employers also provide other benefits such as life insurance, childcare, retirement and financial planning, free food and drinks, on-site health care, and pet-friendly workplaces, among others.
UNC-Chapel Hill business school professors Tim Liu and Paige Ouimet, with two other scholars, offer three reasons why in a December 2017 working paper. Most intuitively, non-wage compensation provides a tax advantage, making a dollar-value benefit worth more than a similar dollar-value in wages. A $1,000 annual gym membership paid by the employer would save an employee paying the 12% federal tax rate and 5.499% North Carolina tax rate would save $174.99 in taxes. Higher tax rates make employers more likely to provide non-wage benefits.
Employers in industries that traditionally employ fewer women or pay them less can use benefits as a way to attract and retain female employees. Maternity benefits can offset lower wages for women compared to men. Some benefits make it easier and less unpleasant to work more. Those benefits actually lead people to work more.
Markets have not accounted for the performance improvements that can accrue to firms that offer better benefits, as those firms provide 0.62% higher monthly returns to equity investors. Non-wage benefits keep taxes low, attract and retain a broader pool of workers, and keep people working longer, happier. No wonder why companies stick with them and perform better when they do. All of this without special government mandates.