Does ‘performance Pay’ Pay? Wage Flexibility over the Great Recession

Abstract: Using quarterly job-by-establishment data from the National Compensation Survey between 2004 and 2014, we document substantial heterogeneity among performance pay and fixed wage jobs over the business cycle. We find that employment growth in performance pay jobs (fixed wage jobs) is either acyclical or countercyclical (procyclical), whereas compensation per employee growth is procyclical (countercyclical) in performance pay jobs (fixed wage workers). Our estimates are identified off the response of similar skilled jobs to metropolitan shocks, controlling for local demographics and establishment fixed effects. We provide suggestive evidence that these results are driven by the procyclicality (countercyclicality) of effort in performance pay (fixed wage) jobs. We subsequently examine the implications for three ongoing sources of debate in macroeconomics: (i) the vanishing procyclicality of labor productivity, (ii) generating sufficient unemployment volatility in search models, and (iii) explaining variation in the labor wedge.