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Performance Pay and Within-Firm Wage Inequality

  • Erling Barth
  • Bernt Bratsberg
  • Torbjørn Hægeland
  • Oddbjørn Raaum


    (Statistics Norway)

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 effort 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 employee 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 Statistics Norway, Research Department in its series Discussion Papers with number 535.

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Date of creation: Apr 2008
Date of revision:
Handle: RePEc:ssb:dispap:535
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  1. Barth, Erling & Raaum, Oddbjorn & Naylor, Robin, 2000. "Union Wage Effects: Does Membership Matter?," Manchester School, University of Manchester, vol. 68(3), pages 259-75, June.
  2. Thomas Lemieux & W. Bentley Macleod & Daniel Parent, 2006. "Performance Pay And Wage Inequality," Departmental Working Papers 2006-08, McGill University, Department of Economics.
  3. 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.
  4. 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.
  5. Pierre Cahuc & Stéphane Carcillo & André Zylberberg, 2014. "Labor Economics," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01076752, HAL.
  6. Charles Brown, 1989. "Firms' Choice of Method of Pay," NBER Working Papers 3065, National Bureau of Economic Research, Inc.
  7. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
  8. 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.
  9. Booth, A-L & Frank, J, 1997. "Performance Related Pay," CEPR Discussion Papers 364, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  10. 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.
  11. Erling Barth & Bernt Bratsberg & Torbjørn Hægeland & Oddbjørn Raaum, 2008. "Who pays for performance?," International Journal of Manpower, Emerald Group Publishing, vol. 29(1), pages 8-29, May.
  12. 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.
  13. Vroman, S. B., 1990. "The union-nonunion wage differential and monitoring costs," Economics Letters, Elsevier, vol. 32(4), pages 405-409, April.
  14. 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).
  15. George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, vol. 90(2), pages 415-420, May.
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