Wage Dispersion and Firm Productivity inDifferent Working Environments

This paper investigates the impact of wage dispersion on firm productivity in different workingenvironments. More precisely, it examines the interaction with: i) the skills of the workforce,using a more appropriate indicator than the standard distinction between white- and bluecollar workers, and ii) the uncertainty of the firm economic environment, which has, to ourknowledge, never been explored on an empirical basis. Using detailed LEED for Belgium, wefind a hump-shaped relationship between (conditional) wage dispersion and firm productivity.This result suggests that up to (beyond) a certain level of wage dispersion, the incentiveeffects of “tournaments” dominate (are dominated by) “fairness” considerations. Findings alsoshow that the intensity of the relationship is stronger for highly skilled workers and in morestable environments. This might be explained by the fact that monitoring costs andproduction-effort elasticity are greater for highly skilled workers and that in the presence ofhigh uncertainty workers have less control over their effort-output relation and associatehigher uncertainty with more unfair environments....