Wage compression

Wage compression refers to the empirical regularity that firms, given their wage policies, prefer better workers over poorer workers for any given job. This causes them to offer higher wages to new workers than those that are given to existing workers. This implies that more productive workers are relatively underpaid, compared to less productive workers holding the same job. Frazis and Loewenstein (2006)^[1] find that “only 32 percent of differences in starting productivity are reflected in differences in starting wages,” and that “productivity growth of 10 percent results in wage growth of only 2.9 per cent.”

References

1. Frazis, H. and M. A. Loewenstein 2006, “Wage Compression and the Division of Returns to Productivity Growth: Evidence from EOPP,” BLS Working Papers 398, US Department of Labor, Washington.