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Performance pay and changes in U.S. labor market dynamics |
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| Authors: | Francesco Nucci Marianna Riggi |
| Affiliation: | 1. Sapienza University of Rome, Italy;2. Bank of Italy, via Nazionale, 91 00184 Rome, Italy;1. Jerusalem College of Technology, Jerusalem 91160, Israel;2. Georgia State University, Atlanta, GA 30303, USA;1. University Paris1 Panthéon – Sorbonne, CES UMR 8174, 106 bd de l''Hôpital, 75013 Paris, France;2. Lombard Odier Asset Management, Avenue des Morgines 6, 1213 Petit-Lancy, Switzerland;3. University Paris 1 Panthéon-Sorbonne, MSE, 106 bd de l''Hôpital, 75013 Paris, France;1. Hamburg University, Department of Economics, Von-Melle-Park 5, 20146 Hamburg, Germany;2. CREATES, Denmark;3. University of Göttingen, Department of Economics, Platz der Göttinger Sieben 3, 37073 Göttingen, Germany;1. University of Wisconsin-Madison, 1180 Observatory Drive, Madison, WI 53706, United States;2. University of Queensland, Australia |
| Abstract: | A shift in the design of labor compensation occurred at around the mid-1980s in the U.S. and deals with an increased role of performance pay in driving the cyclical movements of wages. Using a DSGE model we show that this structural change accounts at least qualitatively for many observed changes in the U.S. labor market dynamics. It generates the disappearance of the procyclical response of labor productivity to non-technology shocks and the reduction of the contractionary effects of technology shocks on hours. Moreover, it is conducive to a drop in the volatility of output, a parallel increase in the volatility of wages and to changes in unconditional correlations consistent with what documented in the U.S. between the pre- and post-1984 periods. |
| Keywords: | Performance pay Procyclical productivity Wage rigidity |
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