Changing Compensation Calls for Updated Social Contract
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American workers are witnessing a profound shift in how they are compensated. A century ago, a job’s pay was almost entirely a paycheck, but now nearly a third comes as benefits like health insurance, retirement plans, and stock options. Moreover, the growth in benefits is concentrated among wealthier workers, leaving the average American behind in an era of rapid technological change, according to a recent working paper I co-authored with Adam Bloomfield and Travis Cyronek.

The policy focus has recently shifted towards the American worker. “The American Dream is rooted in the concept that any citizen can achieve prosperity, upward mobility, and economic security. For too long, the designers of multilateral trade deals have lost sight of this,” said Treasury Secretary Scott Bessent in a recent talk to the Economic Club of New York. The Trump Administration has pointed out that the average American worker has borne the bulk of the burden, consistent with a large body of empirical evidence on globalization and trade. That is not to say there have not been benefits from low prices, but we need to acknowledge the costs.

Our recent working paper points out that the burden on the American worker may be even more severe than previously thought: while we often talk about wages, total compensation – which also includes benefits – tells an even tougher story for the average worker.

At the turn of the 20th century, benefits made up virtually none of a worker’s compensation, but by the late 1990s, over a quarter of a typical worker’s compensation came from non-wage benefits​. Much of this transformation occurred in the post-World War II era: employer-funded “fringe” benefits soared from about 7% of worker compensation in 1947 to 18% by 1979, and now hover around a third of total compensation. While valuable to some workers, expensive benefits often go unused and can risk making workers feel locked into their jobs, while others lack even basic benefits.

On the one hand, benefits like health coverage and retirement contributions provide security and long-term value. On the other hand, many workers would prefer or urgently need higher wages instead of benefits they can’t readily spend. But our new paper shows that both wage and benefits growth for middle and low-income workers has lagged behind productivity.

Moreover, millions of low-wage workers get few or no benefits from their jobs – no health plan, no retirement account, no paid time off. As a result, the gap in overall compensation (wages + benefits) between high- and low-paid workers is even wider than the wage gap alone. A cashier or care aide might earn a bare minimum wage with no health coverage, while a higher-paid manager not only earns more per hour, but also gets thousands of dollars in insurance and pension contributions.  In other words, the people who can least afford out-of-pocket medical costs are the least likely to get health coverage through their jobs. 

To address the challenges posed by benefit-heavy compensation structures, we need to find ways of decoupling basic benefits from a single employer. The expansion of generative artificial intelligence has likely spurred greater self-employment, so now more than ever we need to think through ways of adapting labor market institutions to promote healthy growth. 

We also need to consider how to incentivize employers extending benefits to part-time and low-wage employees. This could involve tax credits for small businesses that provide health insurance or retirement plans to lower-paid staff, or penalties for large companies that leave most workers uncovered. Or, it could involve expanding employee stock ownership plans (ESOPs) that allow employees to reap the profits of the firm so that they can make their own choice on what benefits to purchase on the open market. 

The changing nature of compensation in America – from straight wages toward benefit-heavy packages – calls for an updated social contract. Without intervention, the benefits revolution will continue to bypass millions of workers, accelerating income inequality and social fragmentation. By modernizing policies to reflect how people are paid today, we can protect the dignity of work and strengthen the American workforce across all income levels. 

Dr. Christos A. Makridis is an Associate Research Professor at Arizona State University, Associate Faculty at the Complexity Science Hub in Vienna, and Founder/CEO of Dainamic Banking. He holds doctorates in economics and management science & engineering from Stanford University.


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