Employer size and wage inequality: Rent-sharing role of performance pay

This study analyzes employer contributions to size–wage effects via heterogeneous rentsharing behaviors and compensation for capital dependency. Mainly attributed to differences in performance pay between small and large employers, the increasing size–wage effect has substantially contributed to a growing wage inequality since 1994, even after factoring in observed and unobserved worker characteristics. Analysis of the sources of increasing size–wage effects in terms of firm-side factors reveal that more active rent-sharing behaviors and compensation for capital dependency of large employers that use performance pay translate into the increasing size–wage effect. These results show that, unlike in the United States, the labor market in Korea associates performance pay more with employer characteristics than with worker characteristics.