Bonus Question: Does Flexible Incentive Pay Dampen Unemployment Dynamics?

Meghana Gaur (meghana.gaur@princeton.edu), John Grigsby (john.grigsby@princeton.edu), Jonathon Hazell (j.hazell@lse.ac.uk) and Abdoulaye Ndiaye
Additional contact information
Meghana Gaur: Princeton University
John Grigsby: Princeton University
Jonathon Hazell: London School of Economics

No 16481, IZA Discussion Papers from Institute of Labor Economics (IZA)

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-a-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: incentive contracts; unemployment dynamics; wage rigidity (search for similar items in EconPapers)
JEL-codes: E24 E32 J41 (search for similar items in EconPapers)
Pages: 89 pages
Date: 2023-09
New Economics Papers: this item is included in nep-dge
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Related works:
Working Paper: Bonus Question: Does Flexible Incentive Pay Dampen Unemployment Dynamics? (2023)
Working Paper: Bonus Question: Does Flexible Incentive Pay Dampen Unemployment Dynamics? (2023)
Working Paper: Bonus Question: Does Flexible Incentive Pay Dampen Unemployment Dynamics? (2023)
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