Published in
Oxford Bulletin of Economics and Statistics 75 (3), pages 327-362
DOI: 10.1111/j.1468-0084.2011.00656.x
Abstract
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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