Performance pay and wage inequality

Thomas Lemieux, W. Bentley MacLeod, Daniel Parent

Research output: Contribution to journalArticlepeer-review

307 Scopus citations


An increasing fraction of jobs in the U.S. labor market explicitly pay workers for their performance using bonus pay, commissions, or piece-rate contracts. Using data from the Panel Study of Income Dynamics, we show that compensation in performance-pay jobs is more closely tied to both observed and unobserved productive characteristics of workers than compensation in non-performance-payjobs. We also find that the return to these productive characteristics increased faster over time in performance-pay than in non-performance-pay jobs. We show that this finding is consistent with the view that underlying changes in returns to skill due, for instance, to technological change induce more firms to offer performance-pay contracts and result in more wage inequality among workers who are paid for performance. Thus, performance pay provides a channel through which underlying changes in returns to skill get translated into higher wage inequality. We conclude that this channel accounts for 21% of the growth in the variance of male wages between the late 1970s and the early 1990s and for most of the increase in wage inequality above the eightieth percentile over the same period.

Original languageEnglish (US)
Pages (from-to)1-49
Number of pages49
JournalQuarterly Journal of Economics
Issue number1
StatePublished - Feb 2009

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


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