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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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  28. repec:sae:ilrrev:v:43:y:1990:i:3:p:165-182 is not listed on IDEAS
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