Chapter 125 Question 113

Why would a New Jersey telecom company reward employees with a free BMW instead of cash for a seat? If a company can't hire and keep enough qualified workers, economists offer a ready-made solution: offer higher salaries.But some employers appear to be taking a different tack.For example, Arcnel Wireless Communications of Holmdel, New Jersey, offers a free BMW to all employees who have been with the company for more than a year, hoping to reduce the cost of recruiting and training new employees.Several other companies have used similar reward systems and are said to have had success. Of course, these cars aren't really free.A car costs $9,000 a year for lease and insurance; the employee who gets the car must report this extra income to the tax office.So we run into a conundrum: If the company simply added an extra $9,000 to an employee's annual salary instead of giving them a car, no one would lose, and some would even benefit.

After all, if an employee really wants a BMW, he can rent one at his own expense.Besides, the BMW is a nice car, but for those who don't want it, there's always something else to do with the extra $9,000 a year.So why would companies prefer to give cars rather than cash outright? Essentially, it's a lot like gift giving between family and friends.Why would you give your cousin a tie that he probably will never wear again, instead of just giving him money to spend on something he really likes? Some people will say that this is because it is too easy to give money, and it is more sincere to take the time to choose gifts.This explanation seems to be suitable for small gifts, but it obviously cannot be applied to luxury cars.

Economist Richard.Taylor offered a more reasonable explanation, based on his observation that the best gifts are often the ones we buy ourselves a little bit reluctantly.He asked why the husband was so happy when his wife bought a set of titanium steel golf clubs worth $1,000 through a joint account with her husband.Maybe it was because he really wanted this set of golf equipment, but it was too extravagant to buy it himself.With someone else making this decision for him, he can happily enjoy his golf clubs without guilt. The beauty of thinking about gift giving in this light is that it provides sound advice to the giver.Consider this hypothetical experiment: Which of the following items of equal value would be the best gift for a close friend?

Twenty dollars for a pound of macadamia nuts or ten pounds of peanuts; Send a $75 meal voucher for a high-end restaurant, which can only eat one meal; or a $75 McDonald's dining voucher, which can eat 15 meals; Thirty dollars for four pounds of wild rice or fifty pounds of Uncle Ben's instant rice; Buy a 750ml bottle of Reserve Cognac or ten gallons of cheap white wine for $60: I am afraid that most people will choose the former one. We seem to be able to use the same logic to explain why Arcnet and other companies give away BMWs.Maybe you find it hard to tell your Depression-era parents that you bought a car that costs twice as much as a Toyota Camry; or that you worry that your neighbors will think you're putting on a show; or that you've always wanted a Camry? There is a BMW, but the wife insists on redoing the kitchen first.

The company sends you a gift car, which can dispel all the above concerns.As an added bonus from the company's perspective, giving all long-serving employees a luxury car invites less resentment than giving new hires a raise (which is also increasingly common these days). Will the U.S. labor market continue to move toward wage-in-kind?Unlikely, as Arcnet's approach does not suit other employers.For example, the owners of the Burger King chain may not give out a second-hand Ford as a reward when they encounter a shortage of clerks.Employers who need unskilled workers will presumably continue the old practice of raising wages.

However, the salary method of substituting salary in kind is likely to develop in industries that require skilled workers.Because these companies face a persistent labor shortage, they want to recruit and retain employees who are more sensitive to new luxury products. As this trend develops, the gifts given may also change.The success of this strategy depends on whether the gift can excite the employee, which depends entirely on the local environment at the time.In 1991, the best-selling novelist John.In John Grisham's "Firm," most readers of John Grisham's "Firm" would be surprised that young lawyers were given a brand-new BMW as a signing bonus, even today. will attract media attention.But as more and more companies adopt this approach, it will inevitably lose its impact eventually, and employers will have to pay more.At some point, talented consultants and investment managers may be dismissed because their employers don't reward them with the luxury of a Porsche or a Mexican vacation.

Traditional economic models assume that people have well-defined goals and pursue them productively.However, recent research in behavioral economics has shown that, to a large extent, the choices people make stem from a psychological motivation to build and maintain personal or group identity.This observation helps to explain many choices whose logic is not obvious from the perspective of traditional economic models.