Contract Form, Wage Flexibility, and Employment
Thomas Lemieux, W. Bentley MacLeod, Daniel Parent
American Economic Review · 2012 · Volume 102 · Issue 3
Abstract
We begin with two uncontroversial hypotheses - firm productivity is expensive to measure and employment entails relationship-specific investments. These assumptions imply that firms would optimally choose fixed-wage contracts, and complement these with bonus pay when measuring employee performance is not too costly. These assumptions imply that under an optimal employment contract hours of work is less responsive, while total compensation is more responsive to shocks under bonus-pay contracts compared to fixed wage contracts. Using data from the Panel Study of Income Dynamics (PSID) where shocks are proxied using the local unemployment rate, we find strong support for these two implications.
Keywords
Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital, Wage Level and Structure, Wage Differentials, Labor Contracts, Asymmetric and Private Information, Business Fluctuations, Cycles
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