Performance Pay, Union Bargaining and Within-Firm Wage Inequality

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Oxford Bulletin of Economics and Statistics, online first, 2011.


Theory predicts that performance pay boosts wage dispersion. Workers retain a share of individual productivity shocks and high-efficiency workers receive compensation for greater effort. Collective bargaining can mitigate the effect of performance pay on wage inequality by easing monitoring of common effort standards and group-based pay schemes. Analyses of longitudinal employer–employee data show that the introduction of performance-related pay raises wage inequality in non-union firms, but not in firms with high union density. Although 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 influential unions.

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By Erling Barth, Bernt Bratsberg, Torbjørn Hægeland and Oddbjørn Raaum
Published Aug. 15, 2011 3:03 PM - Last modified July 19, 2012 2:14 PM