Within-Job Wage Inequality: Performance Pay and Job Relatedness

Over the past few decades, we find that about 80% of the widening residual wage inequality to be within jobs. We propose performance-pay incidence and job relatedness as two primary factors driving within-job inequality and embed them into a sorting equilibrium framework. We show that equilibrium sorting is positive assortative both within-job and across jobs. While performance-pay position amplifies within-job wage inequality through self-selection, the overall relationship between job relatedness and within-job wage inequality is found generally ambiguous. To quantify the role played by these factors, we calibrate the model to the US economy in 2000, where the model can account around 92% of the changes in within-job inequality among the highly educated from 1990 to 2000. Counterfactual analysis shows the contributions of performance-pay incidence and job relatedness are about 42% and 26%, respectively, both higher than that of job-specific productivity. While performance-pay incidence is particularly crucial for within-job wage dispersion in business/professional industry and professional occupation, job relatedness is the most important for mining/goods/construction industry and sales occupation.