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A common misconception is that employee benefits are “free” additions to compensation, but they are typically offset by lower wages or salaries. When benefit costs rise, it’s usually employees—not employers—who bear the financial impact through reduced cash compensation. The extent to which increased benefit costs reduce wages depends on several factors, including how much employees value the benefit.

Market dynamics—such as supply and demand for labor and whether costs rise for all employers or just one—also influence how benefit costs are passed on. If all employers face rising benefit costs, wages may stagnate across the board; if only one employer is affected, it could impact hiring competitiveness. Employees often place implicit dollar values on benefits, even if they don't consciously calculate them—just as they do when deciding how to spend money or time.

Workers weigh total compensation (cash + benefits) when making employment decisions, including whether to work and where. Some managers and HR professionals dispute the idea that benefit costs reduce wages, because wage cuts aren’t always visible when benefits change.