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Abstract

Previous studies examining intra-firm wage dispersion and firm performance have focused on wage levels. The authors of this study argue that for purposes of comparing wage dispersion’s positive incentive effects with its adverse morale effects, the dispersion of wage increases is more revealing than the dispersion of wage levels. It is reasonable to expect greater dispersion of wage increases to be associated with higher monetary incentives, but also with increased perceptions of unfairness. The authors’ analysis of linked employer-employee data from Denmark for the years 1992–97 shows that the dispersion of wage growth within firms generally had a negative association with firm performance. The results are robust across industries and categories of firm size, but are mainly driven by white-collar rather than blue-collar workers.

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