Performance Pay and Within-Firm Wage Inequality

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

Discussion Papers from Statistics Norway, Research Department

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.

Keywords: Performance related pay; wage inequality; union bargaining (search for similar items in EconPapers)
JEL-codes: J31 J33 (search for similar items in EconPapers)
Date: 2008-04
New Economics Papers: this item is included in nep-bec and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Performance Pay and Within-Firm Wage Inequality (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ssb:dispap:535

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