Horizontal Wage Inequality within Firms

Joint project with
Chen Lin, Benjamin Lochner, and Thomas Schmid


Wage differences among employees who perform similar tasks within firms, which we refer to as horizontal wage inequality (HWI), account for half of the within-firm wage inequality. Yet, the reasons for their existence are not well understood. We use employee-level data for a large sample of German firms and show that three-quarters of HWI can be explained by the remuneration for heterogeneous employee characteristics such as ability or education. Exploiting differences in human resource policies, monitoring cost, and firm outcomes points to incentive pay via monetary rewards for differences in employee performance as a plausible explanation for the remaining quarter.

Former title(s)

Measuring Workers’ Financial Incentives

Firm Size, Workforce Composition and Wage Inequality