- Title
- Bonus Question: Does Flexible Incentive Pay Dampen Unemployment Dynamics?
- Author(s)
- Meghana Gaur Meghana Gaur (Princeton University)
- John Grigsby John Grigsby (Princeton University)
- Jonathon Hazell Jonathon Hazell (London School of Economics and Political Science)
- Abdoulaye Ndiaye 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-à-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.
- Creation Date
- 2023-09
- Section URL ID
- Paper Number
- 2023-05
- URL
- https://jadhazell.github.io/website/Bonus_Question.pdf
- File Function
- Jel
- J64
- Keyword(s)
- Dynamic Incentive Pay, Unemployment Dynamics
- Suppress
- false
- Series
- 13