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Performance Pay and Within-Firm Wage Inequality

Author

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

    () (Statistics Norway)

Abstract

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.

Suggested Citation

  • Erling Barth & Bernt Bratsberg & Torbjørn Hægeland & Oddbjørn Raaum, 2008. "Performance Pay and Within-Firm Wage Inequality," Discussion Papers 535, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:535
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    References listed on IDEAS

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    Cited by:

    1. Alex Bryson & Richard Freeman & Claudio Lucifora & Michele Pellizzari & Virginie Perotin, 2012. "Paying for Performance: Incentive Pay Schemes and Employees' Financial Participation," CEP Discussion Papers dp1112, Centre for Economic Performance, LSE.
    2. K. Sommerfeld, 2013. "Higher and higher? Performance pay and wage inequality in Germany," Applied Economics, Taylor & Francis Journals, vol. 45(30), pages 4236-4247, October.
    3. John S. Heywood & Daniel Parent, 2012. "Performance Pay and the White-Black Wage Gap," Journal of Labor Economics, University of Chicago Press, vol. 30(2), pages 249-290.
    4. Anders Akerman & Ingvil Gaarder & Magne Mogstad, 2015. "The Skill Complementarity of Broadband Internet," The Quarterly Journal of Economics, Oxford University Press, vol. 130(4), pages 1781-1824.
    5. 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, March.
    6. Alexandre Gazaniol & Catherine Laffineur, 2015. "Does Outward Foreign Direct Investment affect domestic real wages? An investigation using French micro-data," FIW Working Paper series 155, FIW.

    More about this item

    Keywords

    Performance related pay; wage inequality; union bargaining;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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