Working Papers of the ESRC Research Centre on Micro-Social Change
September 1, 1996
The paper extends the theoretical approach in Lazear (1986, 1996) to show that jobs with performance related pay (PRP) attract workers of higher unobservable ability, and also induce workers to provide greater effort. We then test some of the predictions of this model against data from the British Household Panel Survey (BHPS), using earnings as a proxy for productivity. Our estimated earnings equations show that PRP raises wages by about 9% for men and 6% for women over the entire (union and nonunion) sample.