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Title:Performance pay and within-firm wage inequality PDF Logo
Authors:Barth, Erling
Bratsberg, Bernt
Hægeland, Torbjørn
Raaum, Oddbjørn
Issue Date:2009
Series/Report no.:IZA discussion papers 4137
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.
Subjects:Performance related pay
wage inequality
union bargaining
JEL:J31
J33
Persistent Identifier of the first edition:urn:nbn:de:101:1-20090513352
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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