Intra-firm wage dispersion and fîrm performance: a review and empirical tests on Belgian data

The objective of this paper is twofold. First, we survey the theoretical and empirical literature regarding the impact of intra-firm wage dispersion on firm performance. Next, we examine the nature of this relationship in the Belgian private sector, using a unique combination of two large-scale data sets (i.e. the 1995 "Structure of Earnings Survey" and "Structure of Business Survey"). We measure firm performance both in financial and productivity terms. Moreover, three unconditional indicators are used to estimate intrafirm wage dispersion. Empirical results support the existence of a significant and positive relationship between wage inequality and firm performance, even when controlling for the composition of the workforce and firm characteristics. These findings are more in line with the "tournament" models (Lazear and Rosen, 1981) than with the "fairness, morale and cohesiveness" models (Akerlof and Yellen, 1990; Levine, 1991). Results also suggest that the magnitude of the elasticity between wage dispersion and firm performance depends upon the sectoral affiliation of the firm and the composition of the workforce.