Performance Pay and Within-Firm Wage Inequality

Erling Barth, Bernt Bratsberg (), Torbjørn Hægeland and Oddbjørn Raaum

No 4137, IZA Discussion Papers from Institute of Labor Economics (IZA)

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 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.

Keywords: wage inequality; performance related pay; union bargaining (search for similar items in EconPapers)
JEL-codes: J31 J33 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2009-04
New Economics Papers: this item is included in nep-bec, nep-eec and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published - published as 'Performance Pay, Union Bargaining and Within-Firm Wage Inequality' in: Oxford Bulletin of Economics and Statistics, 2012, 74 (3), 327 - 362

Downloads: (external link)
https://docs.iza.org/dp4137.pdf (application/pdf)

Related works:
Working Paper: Performance Pay and Within-Firm Wage Inequality (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp4137

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().