Working Paper: NBER ID: w31722
Authors: Meghana Gaur; John R. Grigsby; Jonathon Hazell; Abdoulaye Ndiaye
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-รก-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.
Keywords: unemployment; incentive pay; wage cyclicality; business cycles
JEL Codes: E24; E32; J33; J41; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wage cyclicality from incentives (J33) | unemployment dynamics (J64) |
| flexible incentive pay (J33) | response of unemployment to shocks (J64) |
| wage cyclicality due to bargaining (J52) | unemployment dynamics (J64) |
| wage fluctuations associated with changes in worker utility (J31) | unemployment responses to shocks (J64) |
| wage changes (J31) | profits (L21) |