Does Wage Dispersion Make All Firms Productive?

This article puts the relationship between wage dispersion and firm productivity to an updatedtest, taking advantage of access to detailed Belgian linked employer-employee panel data.Controlling for simultaneity issues, time-invariant workplace characteristics and dynamics inthe adjustment process of productivity, empirical results reveal the existence of a positiveimpact from conditional intra-firm wage dispersion to firm productivity (measured by theaverage value added per hour worked), which however decreases for higher dispersionlevels. Findings thus suggest that the incentive effect of wage dispersion, predicted forinstance by the ‘tournament’ model, dominates ‘fairness’ and/or ‘sabotage’ considerations.Further results reveal that the influence of wage dispersion on firm productivity is strongeramong firms with a larger proportion of highly skilled workers but does not depend onwhether wages are collectively renegotiated at the firm level....