Performance pay and shifts in macroeconomic correlations

Francesco Nucci and Marianna Riggi ()

No 800, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: A coincidence in time between the volatility break associated with the "Great Moderation" and large changes in the pattern of conditional and unconditional correlations between output, hours and labor productivity was detected by Gal� and Gambetti (2009). We provide a novel explanation for these findings, based on the major changes that occurred in the U.S. design of labor compensation around the mid-1980s. These include a substantial increase in the incidence of performance pay coupled with a higher responsiveness of real wages to the business cycle. We capture this shift in the structure of labor compensation in a Dynamic New Keynesian (DNK) model and show that, by itself, it generates the disappearance of the procyclical response of labor productivity to non-technology shocks and a reduction of the contractionary effects of technology shocks on hours worked. Moreover, it accounts for a large share of the observed drop in output volatility after 1984 and for most of the observed changes in unconditional correlations.

Keywords: procyclical productivity; wage rigidities; performance pay. (search for similar items in EconPapers)
JEL-codes: E24 E32 J22 J3 (search for similar items in EconPapers)
Date: 2011-03
New Economics Papers: this item is included in nep-bec, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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