Internal Wage Dispersion and Firm Performance: White-Collar Evidence

This paper investigates the net relationship between internal wage dispersion and firm performance. An empirical investigation of the relationship between internal wage dispersion and firm performance is performed using linked employer-employee data for Norwegian firms from 1986 to 1997. Contrary to findings in previous empirical work of a positive relationship between internal wage dispersion and firm performance, this analysis finds no such evidence in Norwegian firms, even though internal wage dispersion has increased. The paper contributes to the relatively sparse empirical literature on internal wage dispersion and firm performance. Further, the analysis provides a new econometric specification for estimating internal wage dispersion that explicitly takes into account the hierarchical organization of firms. In contrast to previous work, the analysis also distinguishes between dispersion in both the fixed and variable portions of wages.