Intra-firm wage dispersion and firm performance: Evidence from linked employer-employee data

This paper examines the relationship between intra-firm wage dispersion and firm performance in large Belgian firms using a unique matched employer-employee data set. On the basis of the Winter-Ebmer and Zweimuller's (1999) methodology, we find a positive and significant relationship between intra-firm wage dispersion and profits per capita, even when controlling for individual and firm characteristics and addressing potential simultaneity problems. Results also suggest that the intensity of this relationship is stronger for blue-collar workers and within firms with a high degree of monitoring. These findings are more in line with the 'tournament' models than with the 'fairness, morale and cohesiveness' models.