Structuring Pay. The Effect of Pay-grade Systems on Black-white Earnings Inequality

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Abstract

Previous research demonstrated that relative Black-White earnings differences are greater in higher paying occupation than occupation with lower average income. Current explanations focus on differences in Human and Social Capital differences but have put less focus on organizational processes that may facilitate these differences. Many large organizations use a pay-grade system to structure pay, which might be characterized by few but wider pay grades or more, but narrower grades. Often pay grades become wider at the upper end of the pay-structure thus leaving more room for supervisory discretion in pay decisions. In a natural experiment, this paper examines what happens in a large, bureaucratic organization when it changed its pay-grade systems from being composed of many, narrow grades to fewer, wider grades. Analyzing detailed personnel records 5 years before and after the change suggests that wider pay grades reduced inequality. Specifically when several paygrades were collapsed into larger grades racial segregation in lower grades decreased and Black employees saw greater earnings increases.

Author

• Anne Kathrin Kronberg, Goethe University Frankfurt