Within-Job Wage Inequality: Performance Pay and Job Relatedness

~ 80% of US residual wage inequality is driven by rising performance-pay incidence and “relatedness” note they use education as opposed to skills (on the job training for example) as a proxy for “relatedness”

“…We classify individuals into the high and low education groups according to their years of schooling. We then compute residual wage inequality for both groups during 1983-2013. The results suggestinequality within the high education group not only appears to be higher but also increases faster than the low education groupthe pattern becomes more prominent in the 1990s and the 2000s. In the high education group, even if we control for more job characteristics including industry, occupation, firm size, location, citizenship etc., about 90% of residual wage inequality still remains. This implies that wage inequality is primarily driven by within-industry/occupation inequality. To further confirm this finding, we decompose residual wage inequality into between-job and within-job components over all industry-occupation pairs. The decomposition result shows that within-job inequality accounts for more than 80% of residual wage inequality between 1983 and 2013,and its contribution to the change ranges from 70% to 110% between 1990 and 2002. To the best of our knowledge, this pattern has not been explored in the literature. In order to explain the aforementioned facts, we propose performance-pay incidence and job relatedness as the two potential causes of within-job inequality, in addition to differential job productivities. Workers in performance-pay position are paid according to how much they contribute, and such payments usually include bonus, commission, piece-rate and tips. The counter-part to this is the payment of a fixed hourly wage….we further examine the relationship between within-job wage inequality and performance-pay incidence. We find a significant positive relationship: jobs with higher performance-pay incidence usually have higher wage inequality. This hints the importance of the rising performance-pay incidence for the widening wage dispersion as observed. With regard to job relatedness, we measure it as the relatedness between the field of study of the highest degree earned and the occupation at the current job. We show that job relatedness has positive wage effect: among workers with similar schooling levels, those whose majors are more related to their jobs usually receive higher compensation than others. Moreover, we find a negative relationship between job relatedness and within-job wage inequality: jobs with more related matches are paid more equally. This implies that a reduction in job relatedness as observed in data could also serve to explain within-job wage inequality.…Over the past few decades, we find that about 80% of the widening residual wage inequality to be within jobs. We propose performance-pay incidence and job relatedness as two primary factors driving within-job inequality and embed them into a sorting equilibrium framework. We show that equilibrium sorting is positive assortative both within-job and across jobs. While performance-pay position amplifies within-job wage inequality through self-selection, the overall relationship between job relatedness and within-job wage inequality is found generally ambiguous. To quantify the role played by these factors, we calibrate the model to the US economy in 2000, where the model can account around 92% of the changes in within-job inequality among the highly educated from 1990 to 2000. Counterfactual analysis shows the contributions of performance-pay incidence and job relatedness are about 42% and 26%, respectively, both higher than that of job-specific productivity. While performance-pay incidence is particularly crucial for within-job wage dispersion in business/professional industry and professional occupation, job relatedness is the most important for mining/goods/construction industry and sales occupation….”

Rongsheng Tang, Yang Tang and Ping Wang, "Within-Job Wage Inequality: Performance Pay and Job Relatedness," National Bureau Of Economic Research, June 2020, https://www.nber.org/papers/w27390