AbstractThe paper extends the theoretical approach in Lazear (1986, 1996) to show that jobs with performance related pay (PRP) attract workers of higher unobservable ability, and also induce workers to provide greater effort. We then test some of the predictions of this model against data from the British Household Panel Survey, using earnings as a proxy for productivity. We find that PRP raises wages by about 9% for men and 6% for women over the entire (union and non-union) sample. Our theoretical calculations show that the estimated earnings differentials represent average productivity differentials net of monitoring costs, but not of the disutility of additional effort expended by workers. But the productivity differential is not a true productivity gain, for it includes a non-productive sorting effect as well as the effort effect. For all these reasons, the estimated return to PRP of 9% for men and 6% for women represents upper bounds on the productivity gains.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1593.
Date of creation: Mar 1997
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Other versions of this item:
- Booth, A-L & Frank, J, 1997. "Performance Related Pay," CEPR Discussion Papers 364, Centre for Economic Policy Research, Research School of Economics, Australian National University.
- Booth, Alison L. & Frank, Jeff, 1996. "Performance related pay," ISER Working Paper Series 96-14, Institute for Social and Economic Research.
- J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
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- Sue Fernie & David Metcalf, 1998. "(Not)Hanging on the Telephone: Payment systems in the New Sweatshops," CEP Discussion Papers dp0390, Centre for Economic Performance, LSE.
- Edward P. Lazear, 2000.
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- Hasnain, Zahid & Manning, Nick & Pierskalla Henryk, 2012. "Performance-related pay in the public sector : a review of theory and evidence," Policy Research Working Paper Series 6043, The World Bank.
- Cowling, Marc, 2007. "Performance Related Pay Coverage in the UK," MPRA Paper 1619, University Library of Munich, Germany.
- Pouliakas, Konstantinos & Theodoropoulos, Nikolaos, 2011. "The Effect of Variable Pay Schemes on Workplace Absenteeism," IZA Discussion Papers 5941, Institute for the Study of Labor (IZA).
- NAKABAYASHI, Masaki, 2009. "Poaching, Courts, and Settlements:Complementarity of Governance in Labor Markets," ISS Discussion Paper Series (series F) f145, Institute of Social Science, The University of Tokyo, revised 13 May 2013.
- Chia-ying Liu & Juin-jen Chang, 2011. "Macroeconomic implications of a sharing compensation scheme in a model of endogenous growth," Journal of Economics, Springer, vol. 102(1), pages 57-75, January.
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