Economics Seminar: Performance Pay and Changes in U.S. Labor Market Dynamics

When?

Wednesday 24 October 2012, 16:00 to 17:30

Where?

40 AD 00

Open to:

Public, Staff, Students

Speaker:

Prof Francesco Nucci

Prof Francesco Nucci (Sapienza University of Rome)

"Performance Pay and Changes in U.S. Labor Market Dynamics"

Abstract

We explain the observed changes in the patterns of volatility and correlation between macroeconomic variables through the following shift in the design of labor compensation around the mid-1980s: a greater incidence of performance pay coupled with a higher responsiveness of wages to cyclical conditions. Using a DSGE model we show that this structural change, taken in isolation, generates the disappearance of the procyclical response of productivity to non-technology shocks and a reduction of the contractionary effects of technology shocks on hours. Moreover, it accounts for the observed drop in output volatility, the increase in wage volatility and the changes in unconditional correlations.