Performance Pay and Wage Inequality
We document that an increasing fraction of jobs in the U.S. labor market explicitly pay workers for their performance using bonuses, commissions, or piece-rates. We find that compensation in performance-pay jobs is more closely tied to both observed (by the econometrician) and unobserved productive characteristics of workers. Moreover, the growing incidence of performance-pay can explain 24 percent of the growth in the variance of male wages between the late 1970s and the early 1990s, and accounts for nearly all of the top-end growth in wage dispersion(above the 80th percentile).
The authors would like to thank Larry Katz, David Lee, Edward Lawler, Edward Leamer, Edward Lazear, and participants at the Working Group on Wealth and Power, Yale University, the IZA Workshop on Labor Market Institutions and the NBER Labor Studies Workshop for helpful discussions and comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.