Performance Pay and Shifts in Macroeconomic Correlations

36 Pages Posted: 2 Mar 2009 Last revised: 15 Apr 2011

Multiple version iconThere are 2 versions of this paper

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

Nucci, Francesco and Riggi, Marianna, Performance Pay and Shifts in Macroeconomic Correlations (August 1, 2010). Available at SSRN: https://ssrn.com/abstract=1350707 or http://dx.doi.org/10.2139/ssrn.1350707

Francesco Nucci (Contact Author)

University of Rome I ( email )

Piazzale Aldo Moro
Rome, 00185
Italy
+39 06 4991 0847 (Phone)
+39 06 445 3246 (Fax)

Marianna Riggi

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Register to save articles to
your library

Register

Paper statistics

Downloads
197
Abstract Views
1,000
rank
134,580
PlumX Metrics