D RAMATIC changes in the division of labor compensation between wage and nonwage payments have occurred since World War II. Voluntary employer contributions to private pension and welfare funds have risen from 1.2% of wage and salary compensation in 1947 to 8.3% in 1979, with half the increase taking place since 1969 (see table 1). Major changes in the composition of the fringe benefit package have also taken place during this period. Employer contributions to group health insurance plans have risen from 24% of total fringe benefits in 1947 to 40%o in 1979. If this growth continues, group health insurance will replace pension and profit-sharing plans as the largest fringe benefit expenditure by employers. These trends in the compensation mix have long been noted by researchers and various factors have been offered as explanations, including the favorable tax treatment of fringe benefits, demographic changes such as increased life expectancy, and unionization (Rice, 1966; Ture, 1976; Mabry, 1973; Freeman, 1978). However, most explanations have not been subjected to rigorous empirical testing and the few results that have been published are both questionable and dated. For example, Rice (1966) estimated that changes in the tax rate structure had little influence on the relative increase in fringe benefits from World War II to 1963.' More recent studies (Schiller and Weiss, 1979, 1980) have examined a specific fringe benefit the private pension plan for its impact on turnover and its role as an 'equalizing difference, but these studies have not analyzed the determinants of the compensation mix. This paper discusses the theoretical determinants of the division of labor compensation between fringe benefits and cash income and empirically estimates their importance. It concentrates on the impact of taxation on the compensation mix for several reasons. First, the assumption that rising tax rates encourage individuals to substitute fringe benefits for cash income underlies estimates of the welfare cost of tax preferences (Browning, 1979). Second, proposals to fully tax employee fringe benefits under a comprehensive9' income tax have surfaced in recent years (Nolan, 1977; Clotfelter, 1979). Finally, current federal tax policy is calling for large tax rate reductions to increase supply incentives. Unlike the determinants of the compensation mix that change slowly over time, such as life expectancy, tax rate changes can occur rapidly through legislative action. Reducing tax rates might enlarge the tax base by increasing the fraction of labor income received as taxable cash wages and salaries. Section II outlines the tax treatment of various forms of labor compensation, and in section III other factors thought to influence the choice between wage and nonwage compensation are discussed. Empirical analyses of the compensation mix are presented in section IV. A brief summary and implications of the major findings for the future growth of fringe benefits follow in section V.