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Performance Pay and Within-Firm Wage Inequality

  • Barth, Erling

    ()

    (Institute for Social Research, Oslo)

  • Bratsberg, Bernt

    ()

    (Ragnar Frisch Centre for Economic Research)

  • Haegeland, Torbjørn

    ()

    (Statistics Norway)

  • Raaum, Oddbjørn

    ()

    (Ragnar Frisch Centre for Economic Research)

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 output 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 individual employee pay 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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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4137.

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Length: 47 pages
Date of creation: Apr 2009
Date of revision:
Publication status: published as 'Performance Pay, Union Bargaining and Within-Firm Wage Inequality' in: Oxford Bulletin of Economics and Statistics, 2012, 74 (3), 327 - 362
Handle: RePEc:iza:izadps:dp4137
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  1. George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, vol. 90(2), pages 415-420, May.
  2. Barth, E. & Raaum, O. & Naylor, R., 1998. "Union Wage Effects: Does Membership Matter?," The Warwick Economics Research Paper Series (TWERPS) 500, University of Warwick, Department of Economics.
  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. David Card & Thomas Lemieux & W. Craig Riddell, 2004. "Unions and Wage Inequality," Journal of Labor Research, Transaction Publishers, vol. 25(4), pages 519-562, October.
  5. Booth, Alison L & Frank, Jeff, 1997. "Performance-Related Pay," CEPR Discussion Papers 1593, C.E.P.R. Discussion Papers.
  6. 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.
  7. 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.
  8. Charles Brown, 1989. "Firms' Choice of Method of Pay," NBER Working Papers 3065, National Bureau of Economic Research, Inc.
  9. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, June.
  10. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
  11. Vroman, S. B., 1990. "The union-nonunion wage differential and monitoring costs," Economics Letters, Elsevier, vol. 32(4), pages 405-409, April.
  12. Lemieux, Thomas & MacLeod, W. Bentley & Parent, Daniel, 2007. "Performance Pay and Wage Inequality," IZA Discussion Papers 2850, Institute for the Study of Labor (IZA).
  13. 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).
  14. Booth, Alison L. & Francesconi, Marco, 2000. "Collectivism versus individualism: performance-related pay and union coverage for non-standard workers in Britain," ISER Working Paper Series 2000-35, Institute for Social and Economic Research.
  15. Booth, Alison L & Frank, Jeff, 1999. "Earnings, Productivity, and Performance-Related Pay," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 447-63, July.
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