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The Dispersion of Employees’ Wage Increases and Firm Performance

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Author Info
Grund, Christian () (University of Bonn, CCP and IZA Bonn)
Westergaard-Nielsen, Niels (CCP, Aarhus School of Business and IZA Bonn)

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Abstract

In this contribution we examine the interrelation between intra-firm wage increases and firm performance. Previous studies have focused on the dispersion of wages in order to examine for the empirical dominance of positive monetary incentives effects compared to adverse effects due to fairness considerations. We argue that the dispersion of wage increases rather than wage levels is a crucial measure for monetary incentives in firms. The larger the dispersion of wage increases the higher the amount of monetary incentives in firms. In contrast, huge wage inequality without any promotion possibilities does not induce any monetary incentives. Evidence from unique Danish linked employer employee data shows that large dispersion of wage growth within firms is generally connected with low firm performance. The results are mainly driven by white collar rather than blue collar workers.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1402.

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Length: 26 pages
Date of creation: Nov 2004
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Handle: RePEc:iza:izadps:dp1402

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Related research
Keywords: fairness; firm performance; inequality; monetary incentives; wage dispersion; wage increases;

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Find related papers by JEL classification:
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gächter, Simon & Nosenzo, Daniele & Sefton, Martin, 2008. "The Impact of Social Comparisons on Reciprocity," IZA Discussion Papers 3639, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Nils Braakmann, 2008. "Intra-firm wage inequality and firm performance – First evidence from German linked employer-employee-data," Working Paper Series in Economics 77, University of Lüneburg, Institute of Economics. [Downloadable!]
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