Affordable Access

Performance pay and shifts in macroeconomic correlations

Authors
Disciplines
  • Design
  • Economics

Abstract

A coincidence in time between the volatility break associated with the "Great Moderation" and large changes in the pattern of conditional and unconditional correlations between output, hours and labor productivity was detected by Galí and Gambetti (2009). We provide a novel explanation for these findings, based on the major changes that occurred in the U.S. design of labor compensation around the mid-1980s. These include a substantial increase in the incidence of performance pay coupled with a higher responsiveness of real wages to the business cycle. We capture this shift in the structure of labor compensation in a Dynamic New Keynesian (DNK) model and show that, by itself, it generates the disappearance of the procyclical response of labor productivity to non-technology shocks and a reduction of the contractionary effects of technology shocks on hours worked. Moreover, it accounts for a large share of the observed drop in output volatility after 1984 and for most of the observed changes in unconditional correlations.

There are no comments yet on this publication. Be the first to share your thoughts.

Statistics

Seen <100 times
0 Comments

More articles like this

Pay for Performance: Pay More or Pay Less?

on Journal of the American Colleg... Jan 01, 2005

Pay for performance: pay more or pay less?

on Journal of the American Colleg... September 2005

The macroeconomics of the equal pay act

on Journal of Macroeconomics Jan 01, 1990
More articles like this..