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Class of 2018 Should Choose Higher Salaries

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Class of 2018 Should Choose Higher Salaries

June 11, 2018

For years, recent college graduates entered the job market in search of the holy trinity of perks: salary, benefits, and paid time off.  Take a newly minted, 22-year old political science major and offer him $60,000 a year with two weeks paid vacation and a good health and dental plan, and you would have a hire – until recently, that is. As the Class of 2018 graduates and millennials officially become the biggest cohort in the workforce, the traditional set of employer benefits is beginning to lose its appeal.

When it comes to the workplace, new grads prefer culture to compensation. A staggering 96 percent say they would prefer flexibility over “getting the corner office,” and almost as many think it is more important to learn skills than to earn titles. It makes sense, then, that millennials are willing to take less pay in exchange for these benefits. One study found that, on average, millennials would take a $7,600 pay cut in exchange for “quality of work life.”

It is no surprise that the Class of 2018 is clamoring for nontraditional perks. Faced with a generation that wants to work for “the next Google,” employers are delivering perks that range from the clever (nap pods at the Casper Mattress HQ) to the creative (“music jam” spaces at Credit Karma) to the truly extravagant (Boxed, the online warehouse company, will pay up to $20,000 for an employee’s wedding).

But if they’re smart, members of the Class of 2018 will resist and reverse this trend while they can. Keeping the kitchen stocked with craft beer and organic granola is not just your employer’s way of improving the office culture--it is your company’s way of paying you less.

Ever since World War II, employers have tempted workers into accepting lower salaries in exchange for perks. Today, small start-ups are relatively open about using perks to make up for what they cannot offer in direct compensation.

Perks started with employer-sponsored health insurance. On the eve of World War II, less than ten percent of Americans had some form of private health insurance. But with war came a severe labor shortage, and the fear that, to compete for workers, employers would keep increasing wages until inflation "spiraled out of control." To guard against this, in 1942 President Roosevelt issued an executive order which froze wages, meaning employers would have to compete for workers on benefits alone.

A year later, the IRS made employer-sponsored health insurance tax exempt and the rest is history. By 1950, over half of Americans had private health coverage. In less than a decade, employer-sponsored insurance had gone from a rarity, to a perk, to a national standard. By 1960, two-thirds of Americans were enrolled in private health plans. The next few years would see the establishment of Medicare and Medicaid, and the enshrinement of the insurance system we have today.

As employees grew to expect handsome benefits packages, employers saw an opportunity to offer less in real compensation, and what began as a way for employers to avoid wartime rationing became a clever way to avoid paying out high salaries.

This is best illustrated by David Goldhill’s 2013 book, Catastrophic Care. Goldhill, once the CEO of the Game Show Network, imagines hiring a young worker named Becky, whose work is “worth around $40,000 year.”  Since his company will pay around $5,000 of Becky’s health care premiums each year, Goldhill offers her a salary of $35,000 a year. Goldhill projects that over a lifetime, Becky will contribute $1.9 million of her earnings to the health system, through premiums, taxes, and what she loses in salary.  

Consider pet insurance, a preferred perk among millennials. Such insurance is currently offered by around 5,000 companies, including Microsoft and Xerox. In 2017, fewer than 2 percent of the nation's pet cats and dogs were insured. As millennials continue to choose pets over children, it's not unreasonable to assume that an increasing number of employers will offer pet insurance, and we will once again find ourselves heading down the path to lower wages.

According to the Bureau of Labor Statistics, wages and salaries comprise 68 percent of total compensation today, down from around 73 percent in 2000. A recent report from The Hamilton Project at the Brookings Institution shows that "while benefits have made up an increasingly large share of compensation, wage growth has lagged." If the Class of 2018 wants more benefits, it should not complain about lower wage growth.

Fortunately, there's still time to reverse this trend. The Class of 2018 should look past trendy perks, big and small, and instead seek out employers who will offer real benefits, such as well-funded health savings accounts and 401(k) plans. By making the smart choice now, our nation's newest workers can do their part to secure decent wages for those to come, and get to hold on to a greater share of their paychecks in the process. Who knows - it may even be enough to cover that organic granola.

Tim Rice is a project manager for health policy at the Manhattan Institute.

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