Task Heterogeneity, Employee Characteristics, and Within-Firm Wage Inequality
How much of the within-firm wage inequality comes from wage differences among employees with similar characteristics who perform similar tasks? Using matched employer-employee data from Germany, we show that task heterogeneity accounts for half of the overall within-firm wage differences. For employees who perform similar tasks, differences in their characteristics (e.g., ability or education) explain three-quarters of their wage differences. Residual wage inequality (RWI) among employees with similar characteristics who perform similar tasks accounts for 12 percent of the overall wage differences. RWI increases with task complexity, establishment and firm size, profit sharing, and profitability, which points to pay-for-performance schemes as potential drivers of HWI. These results indicate that firms use RWI to incentivize employees and call for the separate disclosure of wage inequality related to task heterogeneity, employee characteristics, and RWI.