THE PAKISTAN DEVELOPMENT REVIEW
Why Do Small Firms Fail to Graduate to Medium and Large Firms in Pakistan·
In pursuit of its labour welfare policy and to provide protection against certain contingencies, the government plays a crucial role in introducing and encouraging the payment of fringe benefits.l The proportion of total remunerations which make up fringe benefits is influenced by preferential treatment under income tax laws.2 For example, social security and employee’s old-age benefits schemes are financed, respectively, t~ough contributions by the employers at 7 percent and 5 percent of the wages of secured workers. These expenses are reduced if an employer pays more in the form of fringe benefits than wages. Some other gains, including reduction in labour turnover, increase in labour productivity and creation of a favourable public image of the enterprise encourage employers to offer fringe benefits rather than wages. On the other hand, interests of labour unions are to protect or to get an increase in thcic total pay package. Workers will prefer fringe benefits if, with their introduction, net income rises and savings are made by group purchases of some benefits. Thus, these benefits affect decision of labour supply and demand, and enhance welfare.