On the Cyclicality of Real Wages and Employment: New Evidence and Stylized Facts from Performance Pay and Fixed Wage Jobs

Abstract

Using the National Compensation Survey between 2004-2017, we document three stylized facts and quantify cyclical heterogeneity among performance pay and fixed wage jobs. First, there is substantial dispersion in the incidence of performance pay, even within the same occupation; hourly compensation growth in performance pay job has been nearly three-times as large as that in fixed wage jobs; the share of performance pay is increasing in employer size. Second, we find that performance pay jobs respond primarily by adjusting the intensive margin of hourly compensation over the business cycle, whereas fixed wage jobs respond by adjusting the extensive margin of employment. Our estimates are identified off of comparisons of similar jobs within the same establishment over time. We provide suggestive evidence that performance pay allows firms to adjust more easily to uncertainty over the business cycle.

Keywords: business cycle, compensation, employment, incentives, pay for performance

JEL Classification: J21, J22, J31