Worker separation under performance pay: Empirical evidence from Finland

Derek Jones, Panu Kalmi, Takao Kato and Mikko Mäkinen

No 33/2017, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: This paper investigates the role of individual incentive (II) and group incentive (GI) pay as determinants of worker separation. We use a large linked employer-employee panel data set for full-time male manufacturing workers during 1997-2006 from Finland. We follow actual job spells and switches of individual employees and define separation as worker exit from his current employer. The key finding for white-collar workers is that group incentive pay is associated significantly with increased probability of separation and hence diminished employment stability, but in large firms only. For blue-collar workers our results consistently indicate that individual incentive pay is associated with a decreased probability of separation and hence enhanced employment stability, both in small and large firms. Our finding that group incentive pay increases the risk of separation for white-collar workers is more consistent with theoretical work such as Lazear (2000) and Fehr and Gaechter (2000), while uncovering that individual incentive pay decreases employment stability for blue-collar workers supports theoretical work such as Parent (1999) and Paarsch and Shearer (2000).

JEL-codes: J31 J33 J62 J63 M52 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2017_033

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