Performance related pay, productivity and wages in Italy: a quantile regression approach

The authors analyzed the role of Performance Related Pay (PRP) in a sample of Italian manufacturing and service firms and presented standard quantile estimates to investigate heterogeneity in pay-performance impacts on labor productivity and wages. In a second stage, the endogeneity of PRP was taken into account by using instrumental variable quantile regression techniques. They find considerable heterogeneity across the distribution of labor productivity and wages, with the highest role of PRP obtained at the lowest and highest quantiles. However, for all quantiles, the comparison of productivity and wage estimates suggests that PRP might not only be rent-sharing devices, but also incentive schemes that substantially lead to efficiency enhancements. These findings are confirmed for firms under union governance and suggest that well designed policies, that circumvent the limited implementation of PRP practices, would guarantee productivity improvement.