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Pay Inequality and Firm Performance: Evidence from Matched Employer-Employee Data

Author

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  • Heyman, Fredrik

    (Trade Union Institute for Economic Research)

Abstract

This paper uses a large matched employer-employee data set for Sweden to analyse several predictions from tournament theory. For white-collar workers, a positive effect of intra-firm wage dispersion on profits and average pay is found. This result is robust to controls for human capital characteristics and firm fixed-effects as well as to instrumenting the wage dispersion variable. Using data on around 10,000 managers, the same relationships are also found for executives. Further results include a positive relationship between market demand volatility and wage dispersion for managers, and a negative effect of the number of managers (contestants) on managerial pay spread.

Suggested Citation

  • Heyman, Fredrik, 2002. "Pay Inequality and Firm Performance: Evidence from Matched Employer-Employee Data," Working Paper Series 186, Trade Union Institute for Economic Research.
  • Handle: RePEc:hhs:fiefwp:0186
    as

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    File URL: http://swopec.hhs.se/fiefwp/papers/WP186.pdf
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    References listed on IDEAS

    as
    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Mahmood Arai, 2003. "Wages, Profits, and Capital Intensity: Evidence from Matched Worker-Firm Data," Journal of Labor Economics, University of Chicago Press, vol. 21(3), pages 593-618, July.
    3. Levine, David I., 1991. "Cohesiveness, productivity, and wage dispersion," Journal of Economic Behavior & Organization, Elsevier, vol. 15(2), pages 237-255, March.
    4. Hibbs, Douglas A, Jr & Locking, Hakan, 2000. "Wage Dispersion and Productive Efficiency: Evidence for Sweden," Journal of Labor Economics, University of Chicago Press, vol. 18(4), pages 755-782, October.
    5. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-580, June.
    6. Main, Brian G M & O'Reilly, Charles A, III & Wade, James, 1993. "Top Executive Pay: Tournament or Teamwork?," Journal of Labor Economics, University of Chicago Press, vol. 11(4), pages 606-628, October.
    7. James S. Ang & Shmuel Hauser & Beni Lauterbach, 1998. "Contestability and Pay Differential in the Executive Suites," European Financial Management, European Financial Management Association, vol. 4(3), pages 335-360.
    8. Winter-Ebmer, Rudolf & Zweimuller, Josef, 1999. "Intra-Firm Wage Dispersion and Firm Performance," Kyklos, Wiley Blackwell, vol. 52(4), pages 555-572.
    9. Moene, Karl Ove & Wallerstein, Michael, 1997. "Pay Inequality," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 403-430, July.
    10. Bingley, P. & Eriksson, T, 2001. "Pay Spread and Skewness. Employee Effort and Firm Productivity," Papers 01-2, Aarhus School of Business - Department of Economics.
    11. Rosen, Sherwin, 1986. "Prizes and Incentives in Elimination Tournaments," American Economic Review, American Economic Association, vol. 76(4), pages 701-715, September.
    12. Eriksson, Tor, 1999. "Executive Compensation and Tournament Theory: Empirical Tests on Danish Data," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 262-280, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Wage dispersion; Firm performance; Tournament models; Matched employer-employee data;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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