IDEAS home Printed from https://ideas.repec.org/p/pri/econom/2023-05.html

Bonus Question: Does Flexible Incentive Pay Dampen Unemployment Dynamics?

Author

Listed:
  • Meghana Gaur

    (Princeton University)

  • John Grigsby

    (Princeton University)

  • Jonathon Hazell

    (London School of Economics and Political Science)

  • Abdoulaye Ndiaye

    (New York University 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-Ã -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

  • Meghana Gaur & John Grigsby & Jonathon Hazell & Abdoulaye Ndiaye, 2023. "Bonus Question: Does Flexible Incentive Pay Dampen Unemployment Dynamics?," Working Papers 2023-05, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2023-05
    as

    Download full text from publisher

    File URL: https://jadhazell.github.io/website/Bonus_Question.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
    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. Gary Solon & Warren Whatley & Ann Huff Stevens, 1997. "Wage Changes and Intrafirm Job Mobility over the Business Cycle: Two Case Studies," ILR Review, Cornell University, ILR School, vol. 50(3), pages 402-415, April.
    4. Marimon, Ramon & Werner, Jan, 2021. "The envelope theorem, Euler and Bellman equations, without differentiability," Journal of Economic Theory, Elsevier, vol. 196(C).
    5. Patrick J. Kehoe & Virgiliu Midrigan, 2008. "Temporary price changes and the real effects of monetary policy," Working Papers 661, Federal Reserve Bank of Minneapolis.
    6. Raj Chetty, 2012. "Bounds on Elasticities With Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply," Econometrica, Econometric Society, vol. 80(3), pages 969-1018, May.
    7. Cynthia L. Doniger, 2019. "Do Greasy Wheels Curb Inequality?," Finance and Economics Discussion Series 2019-021, Board of Governors of the Federal Reserve System (U.S.).
    8. Eric T. Swanson, 2007. "Real Wage Cyclicality In The Panel Study Of Income Dynamics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(5), pages 617-647, November.
    9. Mitman, Kurt & Rabinovich, Stanislav, 2024. "Do unemployment benefit extensions explain the emergence of jobless recoveries?," Journal of Economic Dynamics and Control, Elsevier, vol. 169(C).
    10. 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.
    11. Basu, S. & House, C.L., 2016. "Allocative and Remitted Wages," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 297-354, Elsevier.
    12. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
    13. Donggyun Shin & Gary Solon, 2007. "New Evidence On Real Wage Cyclicality Within Employer–Employee Matches," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(5), pages 648-660, November.
    14. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 666-689, August.
    15. 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.
    16. Elsby, Michael W.L., 2009. "Evaluating the economic significance of downward nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 154-169, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:ces:ceswps:_11273 is not listed on IDEAS
    2. Meghana Gaur & John R. Grigsby & Jonathon Hazell & Abdoulaye Ndiaye, 2023. "Bonus Question: How Does Flexible Incentive Pay Affect Wage Rigidity?," NBER Working Papers 31722, National Bureau of Economic Research, Inc.
    3. Jonathon Hazell & Bledi Taska, 2020. "Downward Rigidity in the Wage for New Hires," Discussion Papers 2028, Centre for Macroeconomics (CFM).
    4. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, February.
    5. Ran Gu, 2023. "Human Capital and the Business Cycle Effects on the Postgraduate Wage Premium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 345-376, April.
    6. Anger, Silke, 2011. "The Cyclicality of Effective Wages within Employer–Employee Matches in a Rigid Labor Market," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 18(6), pages 786-797.
    7. Gu, Ran, 2019. "Specific Human Capital and Real Wage Cyclicality: An Application to Postgraduate Wage Premium," MPRA Paper 98027, University Library of Munich, Germany.
    8. Daniel Schaefer & Carl Singleton, 2020. "Nominal Wage Adjustments and the Composition of Pay: New Evidence from Payroll Data," Economics Discussion Papers em-dp2020-01, Department of Economics, University of Reading.
    9. Simon Jäger & Benjamin Schoefer & Samuel Young & Josef Zweimüller, 2020. "Wages and the Value of Nonemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(4), pages 1905-1963.
    10. Andrew Snell & Heiko Stuber & Jonathan Thomas, 2018. "Downward Real Wage Rigidity and Equal Treatment Wage Contracts: Theory and Evidence," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 265-284, October.
    11. Kudlyak, Marianna, 2014. "The cyclicality of the user cost of labor," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 53-67.
    12. Martins, Pedro S. & Solon, Gary & Thomas, Jonathan P., 2010. "Measuring What Employers Really Do about Entry Wages over the Business Cycle," IZA Discussion Papers 4757, IZA Network @ LISER.
    13. Bauer, Anja & Lochner, Benjamin, 2020. "History dependence in wages and cyclical selection: Evidence from Germany," Labour Economics, Elsevier, vol. 67(C).
    14. Anger, Silke, 2007. "The cyclicality of effective wages within employer-employee matches: evidence from German panel data," Working Paper Series 783, European Central Bank.
    15. Koenig, Felix & Manning, Alan & Petrongolo, Barbara, 2014. "Reservation wages and the wage flexibility puzzle," LSE Research Online Documents on Economics 60613, London School of Economics and Political Science, LSE Library.
    16. Fei Peng & W. Stanley Siebert, 2008. "Real Wage Cyclicality in Italy," LABOUR, CEIS, vol. 22(4), pages 569-591, December.
    17. Cervini-Plá María & López-Villavicencio Antonia & Silva José I., 2018. "The Heterogeneous Cyclicality of Income and Wages Among the Distribution in the UK," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 18(2), pages 1-13, April.
    18. Fei Peng & Sajid Anwar & Lili Kang, 2020. "Job Movement and Real Wage Flexibility in Eastern and Western Parts of Germany," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(4), pages 764-789, October.
    19. Pedro S. Martins & Gary Solon & Jonathan P. Thomas, 2012. "Measuring What Employers Do about Entry Wages over the Business Cycle: A New Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(4), pages 36-55, October.
    20. Grace Weishi Gu & Eswar Prasad & Thomas Moehrle, 2020. "New Evidence on Cyclical Variation in Average Labor Costs in the United States," The Review of Economics and Statistics, MIT Press, vol. 102(5), pages 966-979, December.
    21. Verdugo, Gregory, 2016. "Real wage cyclicality in the Eurozone before and during the Great Recession: Evidence from micro data," European Economic Review, Elsevier, vol. 82(C), pages 46-69.

    More about this item

    Keywords

    ;
    ;

    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pri:econom:2023-05. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bobray Bordelon (email available below). General contact details of provider: https://edirc.repec.org/data/deprius.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.