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Performance Pay and Within-Firm Wage Inequality

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Author Info
Erling Barth, Bernt Bratsberg, Torbjørn Hægeland and Oddbjørn Raaum () (Statistics Norway)

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Abstract

This paper examines the impact of performance-related pay on wage differentials within firms. Our theoretical framework predicts that, compared to a fixed pay system, pay schemes based on individual effort increase within-firm wage inequality, while group-based bonuses have minor effects on wage dispersion. Theory also predicts an interaction between performance-related pay and union bargaining, where union power reduces the impact of performance pay on wage dispersion. The empirical contribution utilizes two recent Norwegian employer surveys, linked to a full set of employee records. A longitudinal sub-sample allows for identification based on fixed establishment effects. Introduction of performance-related pay is shown to raise residual wage inequality in nonunion firms, but not in firms with high union density. Our findings suggest that even though performance-related pay appears to be on the rise, the overall impact on wage dispersion is likely to be small, particularly in European countries with strong unions.

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Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 535.

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Date of creation: Apr 2008
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Handle: RePEc:ssb:dispap:535

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Related research
Keywords: Performance related pay; wage inequality; union bargaining;

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Find related papers by JEL classification:
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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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. Thomas Lemieux & W. Bentley MacLeod & Daniel Parent, 2007. "Performance Pay and Wage Inequality," NBER Working Papers 13128, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Barth, E. & Raaum, O. & Naylor, R., 1998. "Union Wage Effects: Does Membership Matter?," The Warwick Economics Research Paper Series (TWERPS) 500, University of Warwick, Department of Economics.
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  3. Charles Brown, 1990. "Firms' choice of method of pay," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 43(3), pages 165-182, February.
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  4. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x.
  5. George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, vol. 90(2), pages 415-420, May. [Downloadable!] (restricted)
  6. Erling Barth & Bernt Bratsberg & Torbjørn Hægeland & Oddbjørn Raaum, 2006. "Who Pays for Performance?," IZA Discussion Papers 2142, Institute for the Study of Labor (IZA). [Downloadable!]
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  7. David Blanchflower & Alex Bryson, 2002. "Changes over time in union relative wage effects in the UK and the US revisited," NBER Working Papers 9395, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March. [Downloadable!] (restricted)
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  9. Foss, Nicolai J. & Laursen, Keld, 2005. "Performance pay, delegation and multitasking under uncertainty and innovativeness: An empirical investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 246-276, October. [Downloadable!] (restricted)
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  10. Erling Barth & Claudio Lucifora, 2006. "Wage Dispersion, Markets and Institutions: The Effects of the Boom in Education on the Wage Structure," IZA Discussion Papers 2181, Institute for the Study of Labor (IZA). [Downloadable!]
  11. David Card & Thomas Lemieux & W. Craig Riddell, 2004. "Unions and Wage Inequality," Journal of Labor Research, Transaction Publishers, vol. 25(4), pages 519-562, October. [Downloadable!] (restricted)
  12. Vroman, S. B., 1990. "The union-nonunion wage differential and monitoring costs," Economics Letters, Elsevier, vol. 32(4), pages 405-409, April. [Downloadable!] (restricted)
  13. Booth, A-L & Frank, J, 1997. "Performance Related Pay," CEPR Discussion Papers 364, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University.
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  1. Erling Barth & Bernt Bratsberg & Torbjørn Hægeland & Oddbjørn Raaum, 2006. "Who Pays for Performance?," IZA Discussion Papers 2142, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
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