# Abdou Ndiaye, Meghana Gaur, John R. Grigsby, and Jonathon Hazell's "Bonus Question: Does Flexible Incentive Pay Dampen Unemployment Dynamics?"

##  Abdou Ndiaye, Meghana Gaur, John R. Grigsby, and Jonathon Hazell's "Bonus Question: Does Flexible Incentive Pay Dampen Unemployment Dynamics?"

*October 5, 2023*

We introduce dynamic incentive contracts into a model of unemployment dynamics and present three results. First, wage cyclicality from incentives does not dampen unemployment dynamics: the response of unemployment to shocks is first-order equivalent in an economy with flexible incentive pay and without bargaining, vis-á-vis an economy with rigid wages. Second, wage cyclicality from bargaining dampens unemployment dynamics through the standard mechanism. Third, our calibrated model suggests 46% of wage cyclicality in the data arises from incentives. A standard model without incentives calibrated to weakly procyclical wages, matches unemployment dynamics in our incentive pay model calibrated to strongly procyclical wages.

[Abdou Ndiaye](https://sites.google.com/view/abdoulaye-ndiaye) is an Assistant Professor of Economics at NYU Stern.

Read the full paper [here](https://www.nber.org/papers/w31722?utm_campaign=ntwh&utm_medium=email&utm_source=ntwg1).