No such thing as a free dinner

(featured image: UNC Greensboro/Flickr CC BY NC-ND 2.0)

One of our more intriguing and widespread beliefs is that when others appear to pay for something, it is actually free to us. But looks can be deceptive…

Imagine that you are retiring from a job at a large firm, and a dinner is organized in your honour. On the occasion you are presented with a final cheque, but the amount is rather lower than you expected. When you inquire about it, the explanation you receive is that the cost of the dinner has been deducted. How would you feel about that?

This is exactly what happened to economist Robin Hanson’s mother, according to a recent tweet. It did not provide any details, but let us assume that the cheque did not represent her final monthly wages (in which case it would probably have been theft), but a discretionary bonus, and that the practice was common and not peculiar to her in question (which would have been blatantly discriminatory). Even then, though, it feels wrong, as the disapproving reactions to Robin’s tweet illustrated: they were unanimously critical, scorning even, not only of the (unnamed) company but also of capitalist culture in general.

Paid for with my own money?

But what exactly is the problem here? From an accounting perspective, it would make perfect sense to have a single, dedicated budget for when members of staff retire. That would then cover both their retirement bonus and the cost of the entertainment to send the employee off in style. De facto, any money spent on the festivities would not be available for the bonus (and vice versa). Sure, the way in which the modest sum was justified could be considered as not especially tactful, and one might argue about the allocation between dinner and cash. But does that explain the indignation?

With 85% extra this month, one can dream! (image: Darkmoon Art/Pixabay)

The outrage seems to be related to assumption that there are two distinct categories of money (one for bonuses, and one for dinners) where in fact there is only one. It reminded me of the mental transition I went through when we moved from Belgium to the UK. In my native country, my annual gross salary was 13.85 times my gross monthly pay. This peculiar multiplier was based on (a) one month’s paid holiday, (b) a legally guaranteed year-end bonus equal to one month’s pay, known as a “13th month”, and (c) “double” holiday pay (85% – since enhanced to 92% of one month’s pay). In the UK, my annual salary included 20 days’ holiday pay, but nothing else.

The Belgian way of cutting up wages meant that employees are always particularly cheerful in May or June when the extra holiday pay lands in their accounts, and half of them (the other half are not entitled to the year-end bonus) look forward to December, when the 13th month is paid out. British employees don’t get those pick-me-ups, but like for like, they receive a higher salary every month, of course.

The free money illusion

The bonus and the extra holiday pay look like (and are widely considered as) social gains, a form of free money that has been extricated from the employers. Yet I doubt they are anything of the kind. Employers know how much they are willing to pay in total , or for an employee’s services, and precisely how that is sliced and diced is of little relevance to them.

Another difference between my native and my host country concerns maternity pay. Belgian mothers (to be) enjoy a statutory right to 82% of their salary for the first 30 days of their maternity leave, and three quarters of their salary (capped at just under €900/week – $1060 or £771) for the remainder of the 15 weeks they are entitled to. In the UK, statutory maternity pay is available for longer, and the initial chunk is more generous than in Belgium, at 90% of earnings for the first six weeks. However, it then drops to just over £150 (€175, $206) per week for the remaining 33 weeks, or about 20% of what a Belgian mother receives. It is unsurprising that there is ongoing campaigning in the UK to increase the level to minimum wage and above. But here too, should this come to pass, I fear that the expectation of an uplift that is new, free money is misguided. The value to an employer of a staff member is unchanged, and employers are unlikely to compromise the profitability of the business by paying them more. (For public sector employees, it is the tax payer – including the employees themselves, naturally – who foot the bill.)

Payroll taxes can be similarly misleading: they are contributions to the government coffers, ostensibly made by employers. But is there really a difference between, on the one hand, a company paying an employee £100, out of which the employee pays, say, £30 in income tax and national insurance, and on the other hand a company paying £10 in payroll tax, and then paying the employee £90, out of which the employee pays £20 in income tax and NI? Talking about tax, value added tax or VAT looks like a levy on a company’s turnover, but as most consumers will realize, it is not paid by the companies…

And talking about consumers: you have undoubtedly come across the notion of free shipping. How free (to the buyer) is it really? Should we believe that the suppliers pay for the postage and packaging out of their own pockets? Or might they simply be incorporating these costs in the overall price?

It’s all in the presentation

The question is whether it makes any difference to us whether the total price we pay is all-in, or whether we need to pay extra for shipping. The fact that event ticket seller SeeTickets feels the need to explain the booking fee that is added to the ticket’s face value set by the organizer suggests not everyone is happy with add-ons, but it is not necessarily that simple. Different people may respond differently in different circumstances.

“I deliver free of charge, this van and the fuel cost nothing, and I work for no pay!” (image: Tony Webster/Flickr CC BY 2.0)

‘Free’ shipping is attractive, even if only for the convenience. But if Amazon, the biggest retailer in the world, is still charging for shipping on some orders, we may safely assume that ‘free’ shipping is not unconditionally superior. Splitting the total price into its components, even if, as a consumer, your only option is to pay them all, does provide some transparency that is missing in the all-in price, which some consumers might value. The way things are presented certainly matters.

What companies and governments, and indeed we ourselves, are doing is, explicitly or implicitly, establishing a particular mental accounting framework. While money is inherently fungible, mental accounting overrides this through the use of categories. So, for example a dollar spent on a pair of jeans is considered distinct from one spent on shipping it, or a euro earned as double holiday pay is not the same as a euro earned as regular salary, and a pound paid in payroll tax is different from the same pound raised as employee income tax.

That perspective enables the framing of a situation according to a particular narrative: shipping is ‘free’, holiday pay is an ‘extra’ for which we don’t have to work, and payroll tax is paid for by the employer, not the employee. According to that narrative we may end up feeling relatively better or worse, but the underlying facts are the same.

And those facts are that, whether it concerns online orders, concert tickets, payroll tax, maternity or holiday pay (single or double), or a modest retirement bonus cheque, what may appear to be free money is in fact our own money. As the old proverb has it, there ain’t no such thing as a free lunch, or indeed a free dinner.

About koenfucius

Wisdom or koenfusion? Maybe the difference is not that big.
This entry was posted in Behavioural economics, Economics, Psychology and tagged . Bookmark the permalink.

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