The Dispersion of Employees' Wage Increases and Firm Performance

26 Pages Posted: 19 Nov 2004

See all articles by Christian Grund

Christian Grund

RWTH Aachen University - School of Economics and Business Administration; IZA Institute of Labor Economics

Niels Westergaard-Nielsen

Copenhagen Business School; IZA Institute of Labor Economics

Date Written: November 2004

Abstract

In this contribution we examine the interrelation between intra-firm wage increases and firm performance. Previous studies have focused on the dispersion of wages in order to examine for the empirical dominance of positive monetary incentives effects compared to adverse effects due to fairness considerations. We argue that the dispersion of wage increases rather than wage levels is a crucial measure for monetary incentives in firms. The larger the dispersion of wage increases the higher the amount of monetary incentives in firms. In contrast, huge wage inequality without any promotion possibilities does not induce any monetary incentives. Evidence from unique Danish linked employer employee data shows that large dispersion of wage growth within firms is generally connected with low firm performance. The results are mainly driven by white collar rather than blue collar workers.

Keywords: fairness, firm performance, inequality, monetary incentives, wage dispersion, wage increases

JEL Classification: M52, J31, L25

Suggested Citation

Grund, Christian and Westergaard-Nielsen, Niels, The Dispersion of Employees' Wage Increases and Firm Performance (November 2004). IZA Discussion Paper No. 1402. Available at SSRN: https://ssrn.com/abstract=622685

Christian Grund (Contact Author)

RWTH Aachen University - School of Economics and Business Administration ( email )

Aachen
Germany

IZA Institute of Labor Economics

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

Niels Westergaard-Nielsen

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

IZA Institute of Labor Economics

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

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