Performance Pay and the White-Black Wage Gap

Abstract

We show that the reported tendency for performance pay to be associated with greater wage inequality at the top of the earnings distribution applies only to white workers. This results in the white-black wage differential among those in performance pay jobs growing over the earnings distribution even as the same differential shrinks over the distribution for those not in performance pay jobs. We show this remains true even when examining suitable counterfactuals that hold observables constant between whites and blacks. We explore reasons behind our finding that performance pay is associated with greater racial earnings gaps at the top of the wage distribution focusing on the interactions between discrimination, unmeasured ability and selection. AbstractWe show that the reported tendency for performance pay to be associated with greater wage inequality at the top of the earnings distribution applies only to white workers. This results in the white-black wage differential among those in performance pay jobs growing over the earnings distribution even as the same differential shrinks over the distribution for those not in performance pay jobs. We show this remains true even when examining suitable counterfactuals that hold observables constant between whites and blacks. We explore reasons behind our finding that performance pay is associated with greater racial earnings gaps at the top of the wage distribution focusing on the interactions between discrimination, unmeasured ability and selection.

Gender Gaps in Performance: Evidence from Young Lawyers

“…Lemieux et al (2009) study the evolution of performance pay and wage inequality in the U.S. labormarket from the 1970s to the 1990s. Heywood and Parent (2009) use the same period but focus on the white-black wage gap. They find that the white-black earnings differential is larger in the share of the income distribution in which performance pay is more prevalent.…”

Identifying and measuring economic discrimination

“…Figure 1 illustrates the concept. For a recent empirical example of an RIF-Regression Decomposition that discusses the racial/ethnicity wage gap under performance pay, see [8].…”

Racial wage differentials in developed countries

“…More recent literature also suggests that racial wage differentials may be larger among workers with low skills, while they may be essentially non-existent among high-skill workers, at least in the US [3], and generally tend to vary across the wage distribution and by type of salary. For example, in the US, in jobs paying performance-related wages the white-black wage differential is higher at higher levels of wages, while in jobs where pay is not related to performance the differential is lower at higher levels of wages [12]. In contrast, in the UK the wage differential is smaller in jobs paying performance-related wages than in jobs paying a time rate [13].…”