Session Number: 8b
Session Title: Contributed Papers
Paper Number: 2.3
Session Organizer: Edward Wolff
Discussant:

 
Paper Prepared for the 26^th General Conference of
The International Association for Research in Income and Wealth
Cracow, Poland, 27 August to 2 September 2000

 The distribution of fringe benefits - the case of Norway 

Mads Ivar Kirkeberg & Jon Epland

or additional information please contact:

Mads Ivar Kirkeberg
Statistics Norway
N-2225 Kongvinger, Norway
Email: mik@ssb.no
Fax. +47 62 88 54 83
Telephone +47 62 88 52 45

Jon Epland
Statistics Norway
N-2225 Kongsvinger, Norway
Email: jep@ssb.no
Fax. +47 62 88 54 83
Telephone +47 56 57 63 07 

This paper is placed on the following websites: www.stat.gov.pl
                                                                       www.econ.nyu.edu/dept/iariw

Income from employment is by far the most important source of income for the average household in most modern societies. The main components of employment income are wages and salaries paid out in cash, but according to international recommendations (e.g. the ILO, 1998, Eurostat, 1998) income from employment should also include remuneration in kind. However, many household surveys do not collect in-kind benefits frequently known as "fringe benefits". A meta-survey conducted among 21 members of the Canberra Group showed, for example, that only about half the countries collected fringe benefits in their income surveys (Weinberg, 2000). A similar survey conducted among the Members States of the European Union also showed great differences in respect to coverage of these income items (de Wreede, 1999).
There is, furthermore, reason to believe that fringe benefits have become more popular in recent years (OECD, 1998). For many employers the use of fringe benefits offers a possibility to recruit and retain quality staff, while keeping pay roll costs down.
In Norway many of the more important fringe benefits (e.g. the use of a company car, low interest loans, free newspapers and telephone, subsidised social insurance, etc.) became taxable income during the late 1980s. Since Norwegian income statistics collects all income data from different administrative registers, these income items can be identified and quantified in income statistics. The aim of this paper will be to assess the magnitude and distribution of these fringe benefits. Questions to be addressed are as follows: What is the impact on the size and distribution of income when fringe benefits are included or excluded in the definition of income? Have fringe benefits become a more common way of remuneration in the 1990s, and are some fringe benefits more unequally distributed than others?
The following section of the paper describes the data and the method used to address these questions. Section 3 presents the results while concluding remarks are offered in the final section. 

2. The data

In this study we use both register data and survey data. In order to assess the magnitude and development of fringe benefits we use the Register for-End-of-the-Year Certificates. This register gives detailed information - provided by the employer to the tax authorities - on different types of income, including several fringe benefits that employees receive during the income year. We have comparable data from this register for the period 1991-1998.
The Register for-End-of-the-Year Certificates gives detailed information on wage income. However, when the aim is to study the distribution of particular income components such as fringe benefits the Income Distribution Survey (the IDS) is better suited. The IDS is a representative household survey with a sample size of approximately 15 000 households (1998). Household composition has been established from a household interview, while all income data have been collected from several registers. The annual IDS does not, however, offer the possibility to distinguish fringe benefits from other income components. Instead, fringe benefits are included as part of wages and salaries. In order to identify different types of fringe benefits we have to link the household sample of the IDS with the Register for End-of-the-Year Certificates. However, some of the fringe benefits specified in this register are received by only a small number of individuals. Since there are small chances that these minor income items will be captured in a household survey, we have decided to only include the most widely used fringe benefits in our analysis.

Fringe benefits are, to quote Harrison et. al (2000) income items “given to employees as part of an employment package but which cannot be translated into money that is freely available for any purpose of the employers choice”. Despite the fact that fringe benefits cannot be translated directly into cash income, the value of these benefits nevertheless have their equivalent in cash income. It is, however, difficult to estimate the exact cash equivalent of fringe benefits. Our data is based on tax figures. This implies that we have to accept the valuation made by the tax authorities. There is reason to believe that the tax value of fringe benefits lies somewhat below their economic value. The tax value of fringe benefits such as free telephone and newspaper, for example, usually allows for a tax-free base amount. The tax value of a company car is also less that what would be the economic value. In Norway the tax-assessed value of a company car is calculated as a percentage of the list price of the car. In general this value will be lower than what would be the market value.
We have made no attempt to adjust the tax figures to bring them closer to market values. Instead we accept the estimations as they are.

In Norway most fringe benefits are taxable income. There are, however, a few in-kind benefits that remains tax-free income and where there is no register data available. One such benefit worth mentioning is flight bonuses provided to frequent flyers. This benefit is not provided by the employer but by the airline companies. Opinions may thus differ whether this should be considered a “fringe benefit” or not. It is a fact, nevertheless, that more often than not it is the employers that finance such travels and that the economic value for the beneficiaries - most often top executives in large firms - probably is substantial. Other fringe benefits of a less economic importance also missing in our tax data is the value of free tickets offered by employers (sport arrangements, theatres, opera etc.), free use of holiday houses owned by the employer, employer-subsidised canteens, subsidised PC/ISDN for home offices etc.

2. Results

Have fringe benefits become a more common way of remuneration in Norway in the 1990s? As mentioned earlier the Register for End-of-the-Year-Certificates gives us the possibility to identify some of the taxable fringe benefits. In Table 1-3 (see Annex A) we have looked at nine different fringe benefits in the period 1991-1998. In 1991, eight of these fringe benefits had a taxable value of NOK 3 656 million (approx. 430 million US$ or 450 million Euro). Although this is a substantial amount it nevertheless amounted for less than one percent of total wages and salaries paid that year. This share had risen to one percent eight years later. If we include ”other fringe benefits”, the share was 1.4 percent in 1998. In other words, from a macro point of view, these quite common taxable fringe benefits amount to a very little and stable part of total wages and salaries in Norway. However, if we take a closer look at each of these different fringe benefits the picture is a little bit more complex.
As is shown in Figure 1 some fringe benefits have become more popular during the 1990s, while others have become a less common way of remuneration.
Free (or partly free) telephone has become very common among Norwegian employees during the 1990s. In 1991, 151 000 employees had this benefit. In 1994 the figure had risen to 243 500, and in 1998 to 323 000, or 15.9 percent of all employees (see Figure 1). There are two obvious explanations for this trend: the enormous growth in the use of mobile telephones and Internet.
Free newspaper means that the employer pays the subscription and that the newspaper is delivered to the employees’ private home. Like free telephone, this remuneration has also been more common during the 1990s. From 1991 to 1998 the number receiving a free newspaper doubled from 33 000 to 67 000 employees. However, both free telephone and free newspaper are fringe benefits of little (taxable) income value to the employee.
Company car is the fringe benefit with the highest taxable value. The number of Norwegian employees receiving this benefit has been quite stable during the whole eight-year period, approx. 50-60 000 employees. Measured as a percentage of all employees, the share is about three percent. However, the average taxable value measured in 1998-prices has risen from NOK 32 900 in 1991 to NOK 51 000 in 1998 (see Table 3 in Annex A).
Low-interest loans from employer and contribution to pension scheme are fringe benefits that have become less common in Norway during the 1990s. The benefit of a low-interest loan is calculated as the difference between a "normal interest rate" decided each year by the Parliament and the interest rate actually paid for the loan. Partly due to a strong reduction in the interest rate after 1992, the number of employees receiving such loans has dropped by almost 50 percent from 1991 to 1998 (Figure 1). Contribution to pension scheme is a fringe benefit that will have an impact on the employee after retiring from work. The employer pays a yearly agreed contribution to an insurance company. The employee has to pay income tax of this every year. After retiring he will get a yearly pension from the insurance company. However, the popularity of this fringe benefit has dropped somewhat from 1991 to 1998, partly due to the introduction of new types of pension saving.

1. The number of employees with certain fringe benefits. Norway. 1991-1998 Figure

If we leave Figures 1 and 2 and look at some other fringe benefits shown in Annex A, we find that employer paying for work clothes is quite common in Norway. In 1998, 12.4 percent of the employees received this benefit compared to 11.0 percent in 1991.
Company shares bought at subsidised prices is not a very common fringe benefit among Norwegian employees. The number of persons receiving this fringe benefit has varied between 0.1 and 0.5 percent of all employees. However, the income value of this fringe benefit is only exceeded by company car. The average taxable value has varied between approx. NOK 17 000 in 1992 to approx. NOK 35 000 in 1998. Another type of fringe benefit, which could be mentioned in this context, is the use of share options (not shown in Annex A). This means that the employee has a right (but not a duty) to buy shares at an agreed price in the future. Before 1996 this was a quite popular fringe benefit in Norway among top executives. In 1994 about 13 000 persons received this fringe benefit, but in 1996 the tax law was changed bringing the number down to about 800 in 1998. Before 1996 the employee had to pay tax when he made use of the share option. Since 1996 income tax has to be paid when the employee receives the share option. There is currently a debate in Norway whether one should change the tax rule back to the old regime. The main reason for this proposal is to recruit and retain highly qualified employees in the IT-industry.
Contribution to health insurance is a collective fringe benefit meaning that this is a benefit that is given to all employees in the company, and not just to some few. In 1991 every third employee received this fringe benefit. The number has risen every year since then and in 1998 almost half of Norwegian employees were covered by this insurance.
We end our little historical overview by looking at "other fringe benefits". As mentioned earlier this item contains various unspecified benefits such as free dwelling, free electricity, free holiday trips, gifts from employer, different types of insurance paid by employer etc. For this income item we only have comparable figures back to 1996. In that year 57.6 percent of all Norwegian employees received one or more of these fringe benefits. The figure had risen to 63.5 percent in 1998. However, the total taxable value of these fringe benefits amounted to only 0.34 percent of total wages and salaries that year. Nevertheless, these figures also show that fringe benefits have become a very common way of remuneration in Norway in the 1990s.

In the forgoing sections we have shown that register data can identify a whole range of fringe benefits, but that many of these incomes are received by only a small number of employees. In this section the aim is to investigate the distribution of fringe benefits among different types of employees (our definition of employees also includes persons that have their main source of income from self-employment. The reason for this is that many self-employed have second jobs as employees). Since there are small chances that some of the minor fringe benefits will be captured in a household survey, we have decided to only include the most widely used fringe benefits. In the 1998 survey this includes the following fringe benefits:

• Company car
• Free telephone
• Free newspaper
• Low-interest loans from employer
• Contribution to health insurance
• Various unspecified in-kind benefits (e.g. contribution to life insurance and retirement pension, gifts, paid holiday, free or nearly-free electricity and housing, subsidised child care etc.).

Table 1 shows the proportion of employees that receive different kind of fringe benefits by income classes (deciles), level of education and sector of employment. From the table it can be concluded that there are distinct differences in the availability of the different fringe benefits. Fringe benefits seems to be a far more common way of remuneration for high-income earners and the highly educated than among employees with low income and education. There are, however, some variations in respect to the distribution of particular fringe benefits. The distribution of health insurance and the unspecified "other" types of fringe benefits are much more equally distributed among the employees than for instance company car and free telephone. One reason for this is that both health insurance and "other fringe benefits", in which life insurance paid by employer are included, are benefits typically associated with public sector employment. Note for instance that 87 percent of all employees in the public sector receive "other fringe benefits", compared to only 43 percent in the private sector. This also explains why many employees at the lower end of the income distribution and with a low level of education receive these benefits.
In respect to other types of fringe benefits it is the other way around. Company car, low-interest loans, free telephone and newspapers are all fringe benefits that are more widespread in the private sector than in the public, and these benefits are also clearly associated with the level of income and education of the employee. While for example only 15 percent of all employees have free telephone, more than 50 percent of the employees in the top decile have this kind of benefit.

The proportion of employees with different fringe benefits. 1998

 Accumulation of fringe benefits

How many employees receive several types of fringe benefits and how large proportion of the total income from employment do fringe benefits amount to? In Table 2 we have looked at the accumulation of the six different types of fringe benefits mentioned earlier; company car, free telephone, free newspaper, contribution to health insurance, low-interest loans from employer and various unspecified in-kind benefits. In 1998, about 31.5 percent of Norwegian employees did not receive any of these fringe benefits, but almost six out of ten employees received one or two benefits. However, the value of the fringe benefits for these employees amounts to less than one percent of their average income from employment.

 Table 2
Accumulation of fringe benefits. Norway. 1998

 As seen in Table 2 the accumulation of fringe benefits increases with the size of employment income. For instance, employees receiving five or six of the aforementioned fringe benefits have an average income from employment that is 180 percent higher than for those employees receiving only one fringe benefit. But these employees are quite an exclusive group counting only 0.6 percent of all economically actives in Norway in 1998. The value of fringe benefits amounted to more than 10 percent of average income from employment, for this group of employees.

Should expenses covered by the employer to some extent be considered fringe benefits?

The employee may have different types of expenses in his work covered by the employer. Examples of such expenses are board and lodging when going on business trips, the use of employee’s private car, expenses by having an office at home and expenses by moving to another workplace.
During business trips the employee usually gets all of his or her expenditures covered by the employer. Some employers will cover these expenses when the employee shows his tickets, hotel and restaurant bills when coming back to office. Another way of covering board and lodging is the use of certain specified rates depending on which country (or city) you are going to. For instance, representatives from Statistics Norway going to this IARIW-Conference in Cracow will receive a daily allowance of NOK 720 (approx. 85 US$ or 88 Euro) to cover board and NOK 1400 (approx. 165 US$ or 170 Euro) to cover lodging. These are rates which all employers in the public sector use, but they also serve as guidelines to employers in the private sector. Expenditures paid in accordance with these rates are usually not considered to give the employee a “surplus” during the business trip. Accordingly, the Norwegian tax authorities do not consider remuneration of this kind (or a part of them) as taxable income and they are not included in Norwegian income statistics. In 1998 Norwegian employers paid approx. NOK 4 161 million to cover employees’ expenses for board and lodging during business trips (Table 3).

 Table 3
Employees’ expenses covered by employer. Norway. 1998

 The same arrangement applies in respect to employee using his private car when going on a business trip. The employee will then receive a certain rate per driven kilometre (NOK 3.20) and an extra rate if he or she brings passengers. Obviously, depending on which kind of car the employee has, his expenses per kilometre will vary. In 1998 NOK 5 251 million were received by Norwegian employees for having used their private car at business trips. More than every third employee received such remuneration that year.
A question that might be asked is: are these rates so generous that an employee may in many cases actually “run a surplus” when going on a business trip, and should in fact a part of these payments be considered fringe benefits? There is no obvious answer to this question, and the task of calculating such a surplus would anyhow be a very difficult one.
Other examples of remuneration that cover employees’ expenses are employer paying scholarships, travel grants, expenses the employee might have when moving to another job or having an office in his home. As can be seen from Table 3, these payments are given to relatively few employees.
We have not included these benefits in our analysis of the distribution of fringe benefits, but we are aware of the fact that some may consider even these payments (or at least a part of them) to be fringe benefits.

In a previous section we have shown that there is an upward bias in the distribution of fringe benefits, where high-income earners receive more than their fair share of all fringe benefits. But is the amount of such a size that it makes an impact on the income distribution?
In order to study whether fringe benefits have any impact on the distribution of income among employees, we present two decile distributions of employment income: One before the inclusion of fringe benefits and one after. In addition we present the Gini coefficient for the two income concepts.
Table 4 confirms that fringe benefits are unequally distributed among the employees. When fringe benefits are included in the income concept, this causes a rise in the Gini coefficient and increases the income share of the employees situated at the top of the distribution. It can, nevertheless, be concluded that the impact on the distribution is not particularly strong. The change in the Gini is, for instance, only 1.5 percent.

 Table 4
The impact of fringe benefits on the distribution of employment income. 1998

 The impact on household income

In this final section we change unit of analysis from individuals with employment income to the household. The household unit is of particular interest because most cross-country comparisons of income distribution use this unit, for example comparative analysis based on data from the Luxembourg Income Study Database. In respect to Norwegian data there is a particular interest to study the impact of fringe benefits on the distribution of household income. When Statistics Norway transfers its micro-data to LIS all taxable fringe benefits are included as part of wages and salaries and they cannot be separated from wages in cash. However, many other countries that also send their micro-data to LIS do not collect data on fringe benefits at all (cf. Weinberg, 2000). When Norwegian data are included in cross-country comparisons one may fear that this difference in the definition of income may cause a bias.
In order to study the impact on the distribution of household income, we once more compare income distributions before and after the inclusion of fringe benefits. In order to adjust for differences in household size we divide household income by an equivalent scale. Unlike most analysis of income distribution we use an income concept that is before the deduction of taxes. Our aim is to study the impact of fringe benefits on the income distribution. Because fringe benefits are taxable income in Norway, it will be a difficult task to study the effect on the post-tax distribution without taking into account differences in the tax rate of each single receiver of fringe benefits. Such an exercise lies outside the scope of this paper.
Judging from Table 5 it is fairly safe to conclude that fringe benefits have an insignificant impact on the distribution of household income. There is almost no change in decile shares or in the Gini estimates of the two distributions. Furthermore, because fringe benefits are to a large extent received by high-income earners, we expect the impact on after-tax or disposable income to be even less than on pre-tax income. The reason for this is that high-income earners also have the highest marginal tax rates. We will therefore argue that, at least in respect to Norwegian income data, the inclusion of fringe benefits in the definition of disposable income does not create a serious bias in respect to cross-country comparisons.

 Table 5

The distribution of equivalent household income before taxes, by individuals. 1998

In this paper we have put the focus on fringe benefits in Norway. We have presented figures on the importance of fringe benefits both from a macro perspective based on register data and from a micro perspective based on the Income Distribution Survey. We have found that fringe benefits in general have become a more common way of remuneration during the 1990s, but that there are different trends for different types of fringe benefits. Some fringe benefits have increased substantially in regard to popularity, most notably free telephone, while others have become less popular. Despite the fact that the reported tax value of all fringe benefits is substantial, we have also found that this amount constitute only about one percent of total cash payments.
Fringe benefits are unequally distributed among Norwegian employees. Well-educated high-income earners in the private sector receive more fringe benefits compared to other employees, and the value of the benefits they receive is also higher compared to other groups. There are, however, differences in the distribution of different fringe benefits. While health insurance is relatively equally distributed among the working population, company car and free telephone and newspaper are not. These benefits are to a much larger extent received by high-income earners.
Despite the unequal distribution of fringe benefits among the working population it can be concluded that the impact on the income distribution is small. We have found that the inclusion of fringe benefits in employment income resulted in only a small increase in inequality among the economically active population. We found the impact on household income to be even smaller.
Why then is the impact of fringe benefits on the income distribution so small in Norway? We have already pointed at two potential weaknesses in our data. Firstly, that we base our analysis on tax values that lies somewhat below the actual market value, and secondly, that there are several fringe benefits that are not considered taxable income and consequently not covered in our data. We do not believe, however, that more comprehensive data on fringe benefits would force us to change our conclusions. Fringe benefits would, nonetheless, constitute an insignificant proportion of the dominant means of compensation to Norwegian employees, i.e. wages and salaries. We will instead point to the fact that the Norwegian tax system does not encourage employers to provide fringe benefits to their employees, or perhaps more precisely, a heavy taxation of fringe benefits have reduced the value of such benefits for the beneficiaries. During the 1980s and 1990s more and more fringe benefits became taxable income in order to broaden the tax base, and this process still goes on. The only exception to this trend, as we have mentioned earlier, concerns fringe benefits provided to employees in the growing IT-industry (share options).

de Wreede, W.J. (1999): "Social reporting: reconciliation of sources and dissemination of data. Task 1: Income statistics in the EU Member States". Socioeconomic Statistics Division, Statistics Netherlands.

Eurostat (1998): Recommendations of the Task Force on Social Exclusion and Poverty. Luxembourg.

Harrison, Anne (2000): "The Reconciliation of Micro and Macro Concepts and Terminology".

Paper prepared for the Fourth Meeting of the Canberra Group on Household Income Statistics, Differdange, Luxembourg, May 14-17, 2000.

ILO (1998): Resolution concerning the measurement of employment-related income. The Sixteenth International Conference of Labour Statistics. Geneva, 6-15 October 1998.

OECD (1998): "Income from employment: Concepts and Measurement". Working Party on Employment and Unemployment Statistics, Paris on 23^rd and 24^th March 1998

Weinberg, Daniel H. (2000): "Current Status of Countries". Paper prepared for the Fourth Meeting of the Canberra Group on Household Income Statistics, Differdange, Luxembourg, May 14-17, 2000.

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1)  Other fringe benefits such as free dwelling, free electricity, free holiday trips, gifts from employer, free meals etc. can only be specified from 1996 and later on.
2) We apply an equivalent scale that is based on the square root of household size (E=0.5).
3) The Ministry of Finance has, for example, tried to make flight bonuses taxable income by taking the case to court, but lost (first round).