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Performance Pay and Within-Firm Wage Inequality

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  • Erling Barth
  • Bernt Bratsberg
  • Torbjørn Hægeland
  • Oddbjørn Raaum

    ()
    (Statistics Norway)

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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Bibliographic Info

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

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References

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  1. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 303-28, March.
  2. 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.
  3. Thomas Lemieux & W. Bentley MacLeod & Daniel Parent, 2007. "Performance Pay and Wage Inequality," NBER Working Papers 13128, National Bureau of Economic Research, Inc.
  4. Barth, E. & Naylor, R. & Raaum, O., 1995. "Union Wage Effects; Does Membership Matter?," Memorandum 09/1995, Oslo University, Department of Economics.
  5. Erling Barth & Bernt Bratsberg & Torbjørn Hægeland & Oddbjørn Raaum, 2008. "Who pays for performance?," International Journal of Manpower, Emerald Group Publishing, Emerald Group Publishing, vol. 29(1), pages 8-29, May.
  6. Charles Brown, 1990. "Firms' Choice of Method of Pay," NBER Working Papers 3065, National Bureau of Economic Research, Inc.
  7. Booth, Alison L & Frank, Jeff, 1999. "Earnings, Productivity, and Performance-Related Pay," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 17(3), pages 447-63, July.
  8. George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, vol. 90(2), pages 415-420, May.
  9. Barth, Erling & Lucifora, Claudio, 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).
  10. David Card & Thomas Lemieux & W. Craig Riddell, 2004. "Unions and Wage Inequality," Journal of Labor Research, Transaction Publishers, Transaction Publishers, vol. 25(4), pages 519-562, October.
  11. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, December.
  12. Vroman, S. B., 1990. "The union-nonunion wage differential and monitoring costs," Economics Letters, Elsevier, vol. 32(4), pages 405-409, April.
  13. 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.
  14. repec:ese:iserwp:2000-35 is not listed on IDEAS
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Cited by:
  1. Heywood, John S. & Parent, Daniel, 2009. "Performance Pay and the White-Black Wage Gap," CLSSRN working papers clsrn_admin-2009-42, Vancouver School of Economics, revised 22 Jul 2009.
  2. K. Sommerfeld, 2013. "Higher and higher? Performance pay and wage inequality in Germany," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 45(30), pages 4236-4247, October.
  3. Barth, Erling & Bratsberg, Bernt & Haegeland, Torbjørn & Raaum, Oddbjørn, 2006. "Who Pays for Performance?," IZA Discussion Papers 2142, Institute for the Study of Labor (IZA).
  4. Alex Bryson & Richard Freeman & Claudio Lucifora & Michele Pellizzari & Virginie Perotin, 2012. "Paying for Performance: Incentive Pay Schemes and Employees' Financial Participation," CEP Discussion Papers dp1112, Centre for Economic Performance, LSE.

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