Performance Pay and Within-Firm Wage Inequality

47 Pages Posted: 28 Apr 2009

See all articles by Erling Barth

Erling Barth

Institute for Social Research, Norway; Department of Economics, University of Oslo; IZA Institute of Labor Economics

Bernt Bratsberg

Kansas State University - Department of Economics; University of Oslo - Ragnar Frisch Centre for Economic Research

Torbjorn Haegeland

Statistics Norway; University of Oslo - Ragnar Frisch Centre for Economic Research

Oddbjorn Raaum

University of Oslo - Ragnar Frisch Centre for Economic Research

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: performance related pay, wage inequality, union bargaining

JEL Classification: J31, J33

Suggested Citation

Barth, Erling and Bratsberg, Bernt and Haegeland, Torbjorn and Raaum, Oddbjørn, Performance Pay and Within-Firm Wage Inequality. IZA Discussion Paper No. 4137, Available at SSRN: https://ssrn.com/abstract=1395244

Erling Barth (Contact Author)

Institute for Social Research, Norway ( email )

Munthesgate 31
0260 Oslo
Norway

Department of Economics, University of Oslo ( email )

PO Box 6706 St Olavs plass
Oslo, N-0317
Norway

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Bernt Bratsberg

Kansas State University - Department of Economics ( email )

Manhattan, KS 66502-4001
United States

University of Oslo - Ragnar Frisch Centre for Economic Research

Gaustadalleen 21
N-0349 Oslo
Norway

Torbjorn Haegeland

Statistics Norway ( email )

N-0033 Oslo
Norway

University of Oslo - Ragnar Frisch Centre for Economic Research

Gaustadalleen 21
N-0317 Oslo
Norway

Oddbjørn Raaum

University of Oslo - Ragnar Frisch Centre for Economic Research ( email )

Gaustadalleen 21
N-0317 Oslo
Norway

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
178
Abstract Views
957
rank
190,327
PlumX Metrics