Performance Pay, Union Bargaining and Within-Firm Wage Inequality


  • We are grateful to Carlo Dell'Aringa, Alex Bryson, Donna Ginther, Espen Moen and two anonymous referees for comments on earlier versions of this paper. We also thank seminar participants at the Catholic University of Milan, University of Oslo, workshop on the use and analysis of employer–employee data in Oslo and the lower conference in Esbjerg for useful comments. This work has received financial support from the Norwegian Research Council (grants # 156035/S20 and 173591/S20) the Norwegian Ministry of Labour, the EDWIN project of the European Commission IHP project (grant #HPSE-CT-2002-00108) and is part of the research activities of the centre of equality, social organization, and performance (ESOP), University of Oslo.


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.