Bonus question: how does flexible incentive pay affect unemployment dynamics?

Gaur, Meghana, Grigsby, John, Hazell, Jonathon ORCID: 0009-0002-4930-7946 and Ndiaye, Abdoulaye (2025) Bonus question: how does flexible incentive pay affect unemployment dynamics? American Economic Review: Insights. ISSN 2640-205X (In Press)

Text (Bonus_Question) - Accepted Version Pending embargo until 1 January 2100. Available under License Creative Commons Attribution. Download (724kB)

Abstract

We introduce dynamic incentive contracts into a model of unemployment fluctuations. Our main result is that wage cyclicality from incentives does not affect the response of unemployment to productivity shocks. The response of unemployment is the same, to a first-order, in two economies: one with flexible incentive pay, and another with exogenously fixed wages. This equivalence is due to movements in effort. Under the optimal incentive contract, firms’ profits do not change when wages fall, because the effort of the worker falls too.

Item Type:	Article
Additional Information:	© 2025 The Author(s)
Divisions:	Economics
Subjects:	H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HB Economic Theory
Date Deposited:	24 Oct 2025 09:24
Last Modified:	24 Oct 2025 13:57
URI:	http://eprints.lse.ac.uk/id/eprint/129966

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