Does ‘Performance Pay’ Pay? The Quantitative Effects of Wage-Setting on Firm Dynamics, 2004-2014
نویسندگان
چکیده
Why do firms choose different wage-setting practices and how do they affect firm dynamics over the business cycle? We introduce a novel theory for explaining the take-up of performance pay versus fixed wage contracting across industries. Firms with lower adjustment costs face a greater option value associated with investment before observing actual product demand, whereas firms with higher adjustment costs benefit by locking in contracts in advance to hedge against cyclical uncertainty. Using new panel establishment-level data from the National Compensation Survey, together with the Quarterly Census on Employment and Wages, in the United States between 2004-2014, we document new stylized facts about the relationship between contractual choices and firm dynamics over the business cycle. We test our theory by quantifying the effects of business cycle shocks on both performance pay and fixed wage establishments. Our baseline identification strategy exploits within-establishment deviations in the fraction of performance pay workers and metropolitan changes in employment. JEL: H2, J21, J22, J31, I2.
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