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Performance Pay and Wage Inequality

  • Lemieux, Thomas

    ()

    (University of British Columbia, Vancouver)

  • MacLeod, W. Bentley

    ()

    (Columbia University)

  • Parent, Daniel

    ()

    (HEC Montreal)

We document that an increasing fraction of jobs in the U.S. labor market explicitly pay workers for their performance using bonuses, commissions, or piece-rates. We find that compensation in performance-pay jobs is more closely tied to both observed (by the econometrician) and unobserved productive characteristics of workers. Moreover, the growing incidence of performance-pay can explain 24 percent of the growth in the variance of male wages between the late 1970s and the early 1990s, and accounts for nearly all of the top-end growth in wage dispersion (above the 80th percentile).

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2850.

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Length: 48 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:iza:izadps:dp2850
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  1. David Card & Dean Hyslop, 1997. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 71-122 National Bureau of Economic Research, Inc.
  2. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
  3. Joseph G. Altonji & Charles R. Pierret, 1997. "Employer learning and statistical discrimination," Working Paper Series, Macroeconomic Issues WP-97-11, Federal Reserve Bank of Chicago.
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  6. 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 410-42, June.
  7. Gibbons, R. & Katz, L., 1989. "Does Unmeasured Ability Explain Inter-Industry Wage Differences," Working papers 543, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Charles Brown, 1989. "Firms' Choice of Method of Pay," NBER Working Papers 3065, National Bureau of Economic Research, Inc.
  9. Brown, James N & Light, Audrey, 1992. "Interpreting Panel Data on Job Tenure," Journal of Labor Economics, University of Chicago Press, vol. 10(3), pages 219-57, July.
  10. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2006. "The Polarization of the U.S. Labor Market," NBER Working Papers 11986, National Bureau of Economic Research, Inc.
  11. 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.
  12. Robert Gibbons & Lawrence F. Katz & Thomas Lemieux & Daniel Parent, 2005. "Comparative Advantage, Learning, and Sectoral Wage Determination," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 681-724, October.
  13. Lemieux, Thomas, 1998. "Estimating the Effects of Unions on Wage Inequality in a Panel Data Model with Comparative Advantage and Nonrandom Selection," Journal of Labor Economics, University of Chicago Press, vol. 16(2), pages 261-91, April.
  14. Robert Gibbons, 1986. "Piece-Rate Incentive Schemes," Working papers 424, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. Daniel Parent, 1999. "Methods of Pay and Earnings: A Longitudinal Analysis," ILR Review, Cornell University, ILR School, vol. 53(1), pages 71-86, October.
  16. Freeman, Richard B, 1980. "The Exit-Voice Tradeoff in the Labor Market: Unionism, Job Tenure, Quits, and Separations," The Quarterly Journal of Economics, MIT Press, vol. 94(4), pages 643-73, June.
  17. W. Bentley MacLeod & Daniel Parent, 1998. "Job Characteristics and the Form of Compensation," CIRANO Working Papers 98s-08, CIRANO.
  18. 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.
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  21. repec:eme:rlepps:v:18:y:1999:i:1999:p:177-242 is not listed on IDEAS
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  24. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  25. Thomas Lemieux, 2006. "Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?," American Economic Review, American Economic Association, vol. 96(3), pages 461-498, June.
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