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Performance pay and changes in U.S. labor market dynamics

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  • Nucci, Francesco
  • Riggi, Marianna

Abstract

A shift in the design of labor compensation occurred at around the mid-1980s in the U.S. and deals with an increased role of performance pay in driving the cyclical movements of wages. Using a DSGE model we show that this structural change accounts at least qualitatively for many observed changes in the U.S. labor market dynamics. It generates the disappearance of the procyclical response of labor productivity to non-technology shocks and the reduction of the contractionary effects of technology shocks on hours. Moreover, it is conducive to a drop in the volatility of output, a parallel increase in the volatility of wages and to changes in unconditional correlations consistent with what documented in the U.S. between the pre- and post-1984 periods.

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  • Nucci, Francesco & Riggi, Marianna, 2013. "Performance pay and changes in U.S. labor market dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2796-2813.
  • Handle: RePEc:eee:dyncon:v:37:y:2013:i:12:p:2796-2813
    DOI: 10.1016/j.jedc.2013.07.006
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    2. Julien Champagne, 2015. "The Carrot and the Stick: The Business Cycle Implications of Incentive Pay in the Labor Search Model," Staff Working Papers 15-35, Bank of Canada.
    3. Cantore, Cristiano & Ferroni, Filippo & León-Ledesma, Miguel A., 2017. "The dynamics of hours worked and technology," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 67-82.
    4. Zuzana Molnarova, 2020. "Industry evidence and the vanishing cyclicality of labor productivity," Vienna Economics Papers 2001, University of Vienna, Department of Economics.

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    More about this item

    Keywords

    Performance pay; Procyclical productivity; Wage rigidity;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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