Performance Pay and Within-Firm Wage Inequality
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.
|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|
|Contact details of provider:|| Postal: |
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
|Order Information:|| Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, vol. 90(2), pages 415-420, May.
- 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.
- Barth, Erling & Bratsberg, Bernt & Haegeland, Torbjørn & Raaum, Oddbjørn, 2006.
"Who Pays for Performance?,"
IZA Discussion Papers
2142, Institute for the Study of Labor (IZA).
- 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.
- Booth, Alison L & Frank, Jeff, 1997.
CEPR Discussion Papers
1593, C.E.P.R. Discussion Papers.
- 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.
- 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.
- Nicolai J. Foss & Keld Laursen, 2002. "Performance Pay, Delegation, and Multitasking under Uncertainty and Innovativeness An Empirical Investigation," DRUID Working Papers 02-14, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
- Charles Brown, 1989.
"Firms' Choice of Method of Pay,"
NBER Working Papers
3065, National Bureau of Economic Research, Inc.
- Pierre Cahuc & AndrÃ© Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, June.
- Holmstrom, Bengt & Milgrom, Paul, 1987.
"Aggregation and Linearity in the Provision of Intertemporal Incentives,"
Econometric Society, vol. 55(2), pages 303-28, March.
- Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
- Vroman, S. B., 1990. "The union-nonunion wage differential and monitoring costs," Economics Letters, Elsevier, vol. 32(4), pages 405-409, April.
- Lemieux, Thomas & MacLeod, W. Bentley & Parent, Daniel, 2007.
"Performance Pay and Wage Inequality,"
IZA Discussion Papers
2850, Institute for the Study of Labor (IZA).
- Thomas Lemieux & W. Bentley Macleod & Daniel Parent, 2006. "Performance Pay And Wage Inequality," Departmental Working Papers 2006-08, McGill University, Department of Economics.
- Thomas Lemieux & W. Bentley MacLeod & Daniel Parent, 2007. "Performance Pay and Wage Inequality," NBER Working Papers 13128, National Bureau of Economic Research, Inc.
- 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).
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp4137. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak)
If references are entirely missing, you can add them using this form.