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Pay for Performance and Compensation Inequality: Evidence from the ECEC

Listed author(s):
  • Maury Gittleman,


    (U.S. Bureau of Labor Statistics)

  • Brooks Pierce,


    (U.S. Bureau of Labor Statistics)

It is well known that earnings inequality in the United States has been on the rise over the last three decades. Compensation inequality, while much less studied, has been moving upward as well. Motivated in part by an attempt to explain a widening of inequality in the upper part of the distribution, Lemieux, MacLeod and Parent (2009) investigated the relationship between the use of performance pay schemes and wage inequality using the Panel Study of Income Dynamics. Viewing such a contractual arrangement as a channel through which rising demand for skill is translated into increased inequality, they estimated that pay for performance accounts for about one-fifth of the growth in the variance of male wages between the late 1970s and the early 1990s, and for almost all of the increase in wage inequality in the top quintile during the same period. In this paper, we also assess the relationship between performance pay and inequality, making a number of different contributions to the literature. First, the dataset we use, the Bureau of Labor Statistics’ Employee Costs for Employee Compensation (ECEC), allows us to look at a much broader concept of pay than that used by LMP, which consists largely of hourly earnings inclusive of performance pay (bonuses, piece-rates and commissions). It is important to relate methods of pay to total compensation because any effects noted on wages may be offset or amplified when one moves to broader definitions of compensation. Second, there are numerous types of bonuses, not all of which fall under the rubric of pay for performance. While LMP are forced by the limitations in the PSID to treat all types of bonuses as being the same, in some of our analyses, we are able to distinguish among them. Third, while the LMP analysis ends in the mid-1990s, our investigation is of a more recent time period, 1994 to 2010. Finally, allowing greater precision in our estimates, our dataset is significantly larger than the PSID. Our results suggest that while the presence of performance pay jobs is associated with higher levels of inequality, such jobs have made only a modest contribution toward an increase in inequality in the period under study.

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Paper provided by U.S. Bureau of Labor Statistics in its series Working Papers with number 465.

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Length: 38 pages
Date of creation: Sep 2013
Handle: RePEc:bls:wpaper:ec130060
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References listed on IDEAS
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  1. John S. Heywood & Daniel Parent, 2012. "Performance Pay and the White-Black Wage Gap," Journal of Labor Economics, University of Chicago Press, vol. 30(2), pages 249-290.
  2. Jon Bakija & Adam Cole & Bradley Heim, 2008. "Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data," Department of Economics Working Papers 2010-22, Department of Economics, Williams College, revised Jan 2012.
  3. Charles Brown, 1992. "Wage Levels and Method of Pay," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 366-375, Autumn.
  4. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-431, July.
  5. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-442, June.
  6. K. Sommerfeld, 2013. "Higher and higher? Performance pay and wage inequality in Germany," Applied Economics, Taylor & Francis Journals, vol. 45(30), pages 4236-4247, October.
  7. Maury Gittleman & Brooks Pierce, 2011. "Inter-Industry Wage Differentials Job Content and Unobserved Ability," ILR Review, Cornell University, ILR School, vol. 64(2), pages 356-374, January.
  8. Maury Gittleman & Brooks Pierce, 2012. "Compensation for State and Local Government Workers," Journal of Economic Perspectives, American Economic Association, vol. 26(1), pages 217-242, Winter.
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