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Methods of Pay and Earnings: A Longitudinal Analysis

  • Daniel Parent

In this paper, I investigate the relationship between methods of pay, including piece rates and bonuses, and the level and variance of wages using longitudinal data from the NLSY (1988-1990). Results using OLS and fixed-effects show that piece rate workers earn a premium compared to other workers while the positive effect of bonuses measured with OLS disappears when I use fixed-effects. Also, it is shown that the effect of piece rates is negatively related to the level of tenure, which suggests that rates may be cut as workers accumulate seniority. Finally, using minimum distance procedures to estimate a covariance model of wages, I am able to show that most of the variance for piece rate workers can be attributed to unobserved worker productivity, which is not the case for workers having pay for performance schemes. Cet article examine le lien entre les méthodes de rémunération, incluant les bonus et les métayages, et le niveau ainsi que la variance des revenus de travail. Les données utilisées proviennent du National Longitudinal Survey of Youth (1988-1990). Les résultats indiquent que les travailleurs payés à l'unité gagnent en moyenne davantage que les auters travailleurs, et ce résultat est robuste à l'estimation des premières différences. Par ailleurs, l'estimation d'un modèle simple représentant la structure de covariance des salaires montre que la majorité de la dispersion des salaires pour les travailleurs payés à l'unité est attribuable à la productivité non-observée de ces travailleurs.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 97s-14.

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Length: 28 pages
Date of creation: 01 Apr 1997
Date of revision:
Handle: RePEc:cir:cirwor:97s-14
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  1. Robert Gibbons & Kevin J. Murphy, 1991. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," NBER Working Papers 3792, National Bureau of Economic Research, Inc.
  2. Macleod, W.B. & Kenemoto, Y., 1990. "The Ratchet Effect and the Market for Second-Hand Workers," Cahiers de recherche 9027, Universite de Montreal, Departement de sciences economiques.
  3. John M. Abowd & David Card, 1986. "On the Covariance Structure of Earnings and Hours Changes," NBER Working Papers 1832, National Bureau of Economic Research, Inc.
  4. Charles Brown, 1992. "Wage Levels and Method of Pay," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 366-375, Autumn.
  5. George Baker & Robert Gibbons & Kevin J. Murphy, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 1125-1156.
  6. Baker, George P & Jensen, Michael C & Murphy, Kevin J, 1988. " Compensation and Incentives: Practice vs. Theory," Journal of Finance, American Finance Association, vol. 43(3), pages 593-616, July.
  7. Ewing, Bradley T., 1996. "Wages and performance-based pay: Evidence from the NLSY," Economics Letters, Elsevier, vol. 51(2), pages 241-246, May.
  8. Chamberlain, Gary, 1982. "Multivariate regression models for panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 5-46, January.
  9. Henry S. Farber & Robert Gibbons, 1996. "Learning and Wage Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 111(4), pages 1007-1047.
  10. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 921-955.
  11. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April.
  12. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 881-919.
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