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Bonus Question: Does Flexible Incentive Pay Dampen Unemployment Dynamics?

Author

Listed:
  • Gaur, Meghana

    (Princeton University)

  • Grigsby, John

    (Princeton University)

  • Hazell, Jonathon

    (London School of Economics)

  • Ndiaye, Abdoulaye

    (NYU Stern)

Abstract

We introduce dynamic incentive contracts into a model of unemployment dynamics and present three results. First, wage cyclicality from incentives does not dampen unemployment dynamics: the response of unemployment to shocks is first-order equivalent in an economy with flexible incentive pay and without bargaining, vis-a-vis an economy with rigid wages. Second, wage cyclicality from bargaining dampens unemployment dynamics through the standard mechanism. Third, our calibrated model suggests 46% of wage cyclicality in the data arises from incentives. A standard model without incentives calibrated to weakly procyclical wages, matches unemployment dynamics in our incentive pay model calibrated to strongly procyclical wages.

Suggested Citation

  • Gaur, Meghana & Grigsby, John & Hazell, Jonathon & Ndiaye, Abdoulaye, 2023. "Bonus Question: Does Flexible Incentive Pay Dampen Unemployment Dynamics?," IZA Discussion Papers 16481, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp16481
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    References listed on IDEAS

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    1. Patrick J. Kehoe & Virgiliu Midrigan, 2008. "Temporary price changes and the real effects of monetary policy," Working Papers 661, Federal Reserve Bank of Minneapolis.
    2. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1713-1764, December.
    3. Fernando Alvarez & Hervé Le Bihan & Francesco Lippi, 2016. "The Real Effects of Monetary Shocks in Sticky Price Models: A Sufficient Statistic Approach," American Economic Review, American Economic Association, vol. 106(10), pages 2817-2851, October.
    4. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
    5. Beaudry, Paul & DiNardo, John, 1991. "The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 665-688, August.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    incentive contracts; unemployment dynamics; 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
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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