Establishment Size, Industry, and Wage Inequality: The Roles of Bonus and Rent Sharing

Abstract

Despite the growing evidence on the relation between bonuses (or performance pay) and wage inequality, studies have focused on how bonuses influence wage inequality among jobs. This study provides new evidence on the large contribution of bonuses (i.e., performance pay and non-production pay) to wage inequality among employers via heterogeneous rent-sharing behaviors, focusing on industry affiliation and employer size. Using comprehensive Korean worker-level data, I first show that wage between-inequality at the industry-size level has substantially contributed to a growing wage inequality trend since 1994 even after controlling for observed and unobserved worker characteristics and factoring in sorting effects

this phenomenon is mainly due to the differences in bonuses between industry-size groups, while the effects of bonuses on within-inequality are limited. I then show the sources of the rising wage between-inequality in terms of firm-side factors using firm-level data merged with worker-level data at the industry-size-year level. I find that changes in the estimated prices of labor productivity (rent-sharing parameters) and the capital-to-labor ratio are the main factors in the increasing dispersal of between-inequality and that they became more positively correlated with wages between 2009 and 2015 than they were before 2009. This positive correlation is observed even more clearly when bonuses are included in wages. These findings show that employers exhibit rent-sharing behavior and compensate for capital dependency using bonuses, and bonus differentials among employers are translated into increased between-inequality of wages.