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Wage Dispersion and Firm Productivity in Different Working Environments

Author Info

Listed author(s):
  • Benoît Mahy
  • François Rycx
  • Mélanie Volral

Abstract

This paper investigates the impact of wage dispersion on firm productivity in different working environments. More precisely, it examines the interaction with: i) the skills of the workforce, using a more appropriate indicator than the standard distinction between white- and blue collar-workers, and ii) the uncertainty of the firm economic environment, which has, to our knowledge, never been explored on an empirical basis. Using detailed LEED for Belgium, we find a hump-shaped relationship between (conditional) wage dispersion and firm productivity. This result suggests that up to (beyond) a certain level of wage dispersion, the incentive effects of “tournaments” dominate (are dominated by) “fairness” considerations. Findings also show that the intensity of the relationship is stronger for highly skilled workers and in more stable environments. This might be explained by the fact that monitoring costs and production-effort elasticity are greater for highly skilled workers and that in the presence of high uncertainty workers have less control over their effort-output relation and associate higher uncertainty with more unfair environments.

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File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/53971/1/RePEc_sol_wpaper_09-012.pdf
File Function: RePEc_sol_wpaper_09-012
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Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 09-012.RS.

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Length: 27 p.
Date of creation: 2009
Publication status: Published by:
Handle: RePEc:sol:wpaper:09-012
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Keywords: Wage dispersion; labour productivity; working environments; personnel economics; linked employer-employee data.;

Other versions of this item:

Find related papers by JEL classification:
  • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
  • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
  • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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  1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
  2. George A. Akerlof & Janet L. Yellen, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 255-283.
  3. Fredrik Heyman, 2005. "Pay inequality and firm performance: evidence from matched employer-employee data," Applied Economics, Taylor & Francis Journals, vol. 37(11), pages 1313-1327.
  4. Edward P. Lazear & Paul Oyer, 2012. "Personnel Economics," Introductory Chapters,in: Robert Gibbons & John Roberts (ed.), The Handbook of Organizational Economics Princeton University Press.
  5. Hibbs, Douglas A, Jr & Locking, Hakan, 2000. "Wage Dispersion and Productive Efficiency: Evidence for Sweden," Journal of Labor Economics, University of Chicago Press, vol. 18(4), pages 755-782, October.
  6. Milgrom, Paul R, 1988. "Employment Contracts, Influence Activities, and Efficient Organization Design," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 42-60, February.
  7. Thierry Lallemand & Robert Plasman & François Rycx, 2009. "Wage Structure and Firm Productivity in Belgium," NBER Chapters,in: The Structure of Wages: An International Comparison, pages 179-215 National Bureau of Economic Research, Inc.
  8. Winter-Ebmer, Rudolf & Zweimuller, Josef, 1999. "Intra-Firm Wage Dispersion and Firm Performance," Kyklos, Wiley Blackwell, vol. 52(4), pages 555-572.
  9. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883, July.
  10. P. B. Beaumont & R. I. D. Harris, 2003. "Internal Wage Structures and Organizational Performance," British Journal of Industrial Relations, London School of Economics, vol. 41(1), pages 53-70, 03.
  11. Eriksson, Tor, 1999. "Executive Compensation and Tournament Theory: Empirical Tests on Danish Data," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 262-280, April.
  12. Martins, Pedro S., 2008. "Dispersion in wage premiums and firm performance," Economics Letters, Elsevier, vol. 101(1), pages 63-65, October.
  13. Levine, David I., 1991. "Cohesiveness, productivity, and wage dispersion," Journal of Economic Behavior & Organization, Elsevier, vol. 15(2), pages 237-255, March.
  14. Erling Barth, 2008. "Who pays for performance?," International Journal of Manpower, Emerald Group Publishing, vol. 29(1), pages 8-29, March.
  15. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-580, June.
  16. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
  17. Main, Brian G M & O'Reilly, Charles A, III & Wade, James, 1993. "Top Executive Pay: Tournament or Teamwork?," Journal of Labor Economics, University of Chicago Press, vol. 11(4), pages 606-628, October.
  18. 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.
  19. Donald Richards & Robert Guell, 1998. "Baseball success and the structure of salaries," Applied Economics Letters, Taylor & Francis Journals, vol. 5(5), pages 291-296.
  20. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
  21. Uwe Jirjahn & Kornelius Kraft, 2007. "Intra-firm Wage Dispersion and Firm Performance - Is There a Uniform Relationship?," Kyklos, Wiley Blackwell, vol. 60(2), pages 231-253, 05.
  22. Milgrom, Paul & Roberts, John, 1990. "The Efficiency of Equity in Organizational Decision Processes," American Economic Review, American Economic Association, vol. 80(2), pages 154-159, May.
  23. Nils Braakmann, 2008. "Intra-firm wage inequality and firm performance – First evidence from German linked employer-employee-data," Working Paper Series in Economics 77, University of Lüneburg, Institute of Economics.
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Cited by:

  1. Kampelmann, Stephan & Mahy, Benoît & Rycx, Francois & Vermeylen, Guillaume, 2016. "Who Is Your Perfect Match? Educational Norms, Educational Mismatch and Firm Profitability," IZA Discussion Papers 10399, Institute for the Study of Labor (IZA).
  2. Kampelmann, Stephan & Rycx, François, 2012. "The impact of educational mismatch on firm productivity: Evidence from linked panel data," Economics of Education Review, Elsevier, vol. 31(6), pages 918-931.
  3. François Rycx & Yves Saks & Ilan Tojerow, 2015. "Does Education Raise Productivity and Wages Equally? The Moderating Roles of Age, Gender and Industry," Working Paper Research 281, National Bank of Belgium.
  4. Carolina Laureti, 2015. "The Debt Puzzle in Dhaka’s Slums: Do Poor People Co-hold for Liquidity Needs?," Working Papers CEB 15-021, ULB -- Universite Libre de Bruxelles.
  5. Benoît Mahy & François Rycx & Guillaume Vermeylen, 2015. "Educational Mismatch and Firm Productivity: Do Skills, Technology and Uncertainty Matter?," De Economist, Springer, vol. 163(2), pages 233-262, June.
  6. Benoît Mahy & François Rycx & Mélanie Volral, 2011. "Does Wage Dispersion Make All Firms Productive?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(4), pages 455-489, 09.
  7. Carolina Laureti, 2017. "Why do Poor People Co-hold Debt and Liquid Savings?," Working Papers CEB 17-007, ULB -- Universite Libre de Bruxelles.
  8. Dai, Yunhao & Kong, Dongmin & Xu, Jin, 2017. "Does fairness breed efficiency? Pay gap and firm productivity in China," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 406-422.

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