Abstract
Using data from the British Household Panel Survey (BHPS) we show performance pay (PP) increased earnings dispersion among men and women, and to a lesser extent among full-time working women, in the decade of economic growth which ended with the recession of 2008. PP was also associated with some compression in the lower half of the wage distribution for women. The effects were predominantly associated with a broad measure of PP that included bonuses. However, these effects were modest, typically not exceeding a 0.05 log points change in log wage differentials over the decade. Moreover there is no indication that PP became increasingly prevalent, as some had predicted, over the decade prior to recession.
Highlights
Income inequality has grown in English-speaking economies in recent decades, largely due to growing wage inequality
Using data from the British Household Panel Survey (BHPS) we show performance pay (PP) increased earnings dispersion among men and women, and to a lesser extent among full-time working women, in the decade of economic growth which ended with the recession of 2008
LMPs (2009) model, which draws on the work of Lazear (1986, 2000) and Prendergast (1999), indicates PP generates higher wage dispersion than fixed rate pay (FP) due to the sorting of high ability workers into PP jobs – a labor market segmentation type argument – and because PP reflects individuals' marginal product more accurately than fixed wage schedules
Summary
Income inequality has grown in English-speaking economies in recent decades, largely due to growing wage inequality (see Atkinson et al, 2011, for international evidence; and Brewer and Wren-Lewis, 2016, who show that over 1978–2008 in the UK, rising earnings inequality counteracted falls in inequality due to other income components). Using establishment data from the Bureau of Labor Statistics' Employer Costs for Employee Compensation (ECEC) series (which derives from the National Compensation Survey) Gittleman and Pierce (2013) show the proportion of jobs with PP rose in the 1990s, only to fall in the 2000s such that, by 2013, it had declined by about one-fifth since LMP's study period, irrespective of how one measures PP This decline is apparent throughout the wage distribution but is concentrated among low earners. There is some evidence that annual bonuses have contributed to an increase in wage inequality at the top of the earnings distribution in the last decade or so, primarily as a result of a large bonus receipt by bankers, traders and other wellpaid professionals in the Finance sector (Bell and Van Reenen, 2010, 2011, 2013).1 These employees may be sharing in the substantial rents generated by a lack of competition in the sector.
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