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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
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    References listed on IDEAS

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    More about this item

    Keywords

    Dynamic Incentive Pay; Unemployment Dynamics;

    JEL classification:

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

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