Establishment Size and Wage Inequality: The Roles of Performance Pay and Rent Sharing

This study provides new evidence on the large contribution of performance 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 betweeninequality at the industry-size level has substantially contributed to a growing wage inequality trend since 1994 even after controlling for observed andunobserved worker characteristics and factoring in sorting effects; this phenomenon is dominated by the employer size-wage effect. The size-wage effect is mainly due to the differences in performance pay between employer sizes, while the effects of performance pay 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 balance sheet data merged with worker-level data at the industry-size-year level. I find that changes in the estimated rentsharing parameters and the prices of 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 performance pay is included in wages. These findings show that employers exhibit rent-sharing behavior and compensate for capital dependency using performance pay, and differentials of performance pay among employers are translated into increased between-inequality of wages.