Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/282608 
Year of Publication: 
2023
Series/Report no.: 
IZA Discussion Papers No. 16481
Publisher: 
Institute of Labor Economics (IZA), Bonn
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.
Subjects: 
incentive contracts
unemployment dynamics
wage rigidity
JEL: 
E24
E32
J41
Document Type: 
Working Paper

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