Performance Pay and Shifts in Macroeconomic Correlations
36 Pages Posted: 2 Mar 2009 Last revised: 15 Apr 2011
There are 2 versions of this paper
Performance Pay and Shifts in Macroeconomic Correlations
Performance Pay and Shifts in Macroeconomic Correlations
Date Written: August 1, 2010
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 among output, hours and labor productivity has been detected by Gali and Gambetti (2009). We provide a novel explanation for these findings, based on major changes 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, on its own, it generates the disappearance of the procyclical response of labor productivity to non-technology shocks and a reduction of the contractionary effects on hours worked of technology shocks. Moreover, it accounts for a large fraction of the observed drop in output volatility after 1984 and for most of the observed changes in unconditional correlations.
Keywords: Procyclical productivity, wage rigidities, performance pay
JEL Classification: E24, E32, J3, J22
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy
By Lawrence J. Christiano, Martin Eichenbaum, ...
-
Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy
By Lawrence J. Christiano, Martin Eichenbaum, ...
-
An Estimated Stochastic Dynamic General Equilibrium Model of the Euro Area
By Frank Smets and Rafael Wouters
-
An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area
By Frank Smets and Rafael Wouters
-
Optimal Monetary Policy with Staggered Wage and Price Contracts
By Christopher J. Erceg, Dale W. Henderson, ...
-
Shocks and Frictions in Us Business Cycles: A Bayesian DSGE Approach
By Frank Smets and Rafael Wouters
-
Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach
By Frank Smets and Rafael Wouters
-
Shocks and Frictions in U.S. Business Cycles: A Bayesian DSGE Approach
By Frank Smets and Rafael Wouters
-
Resuscitating Real Business Cycles
By Robert G. King and Sergio T. Rebelo
-
Has Monetary Policy Become More Effective?
By Jean Boivin and Marc P. Giannoni