Bonus Question: How Does Flexible Incentive Pay Affect Unemployment Dynamics?

Meghana Gaur, John Grigsby, Jonathon Hazell and Abdoulaye Ndiaye

No 18513, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We introduce dynamic incentive contracts into a model of unemployment fluctuations. Our main result is that wage cyclicality from incentives does not affect the response of unemployment to productivity shocks. The response of unemployment is the same, to a first order, in two economies: one with flexible incentive pay, and another with exogenously fixed wages. This equivalence is due to movements in effort. Under the optimal incentive contract, firms’ profits do not change when wages fall, because the effort of the worker falls too.

Keywords: Unemployment dynamics; Inflation; wage cyclicality; Dynamic incentives; Incentive pay; Wage rigidity; Bargaining (search for similar items in EconPapers)
JEL-codes: E24 E32 J33 J41 J64 (search for similar items in EconPapers)
Date: 2023-10
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP18513 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:18513

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP18513

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().