Relative performance evaluation and wage inequality

Abstract

This paper studies the impact of relative performance evaluation (RPE) on skilled‐unskilled wage inequality. We find that in an economy with full employment, skilled‐unskilled wage inequality will be expanded when the strength of RPE increases. However, when the urban sector is under the minimum wage restriction, the impact of RPE on skilled‐unskilled wage inequality depends on the substitution elasticity between land and unskilled labor in the rural sector. If this substitution elasticity is sufficiently large (resp. small), skilled‐unskilled wage inequality will be expanded (resp. narrowed down) when the strength of RPE rises.