Scandinavian Working Papers in Economics

Working Paper Series,
Trade Union Institute for Economic Research

No 186: Pay Inequality and Firm Performance: Evidence from Matched Employer-Employee Data

Fredrik Heyman
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Fredrik Heyman: Trade Union Institute for Economic Research, Postal: FIEF, Wallingatan 38, SE-111 24 Stockholm, Sweden

Abstract: This paper uses a large matched employer-employee data set for Sweden to analyse several predictions from tournament theory. For white-collar workers, a positive effect of intra-firm wage dispersion on profits and average pay is found. This result is robust to controls for human capital characteristics and firm fixed-effects as well as to instrumenting the wage dispersion variable. Using data on around 10,000 managers, the same relationships are also found for executives. Further results include a positive relationship between market demand volatility and wage dispersion for managers, and a negative effect of the number of managers (contestants) on managerial pay spread.

Keywords: Wage dispersion; Firm performance; Tournament models; Matched employer-employee data

JEL-codes: J31; J41

38 pages, December 19, 2002

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