Performance Pay and Earnings Dynamics

Using data from the Panel Study of Income Dynamics, we study how the autocovari-ance structure of wages and earnings di¤ers under di¤erent contractual arrangements. We divide jobs on the basis of whether they pay for performance, and whether they are covered by collective bargaining agreements. While cross-sectional wage inequality is larger in performance-pay than non-performance-pay jobs, precisely the opposite hap-pens in the case of annual earnings. This suggests that hours of work respond more to demand shocks when wages are inexible (in non-performance-pay jobs) than when they are exible because of performance-pay schemes. This result only holds, however, for purely cross-sectional measures of inequality. Since the variation in hours is mostly transitory, from a long-run perspective inequality remains larger in performance-pay than non-performance-pay jobs. The authors would like to thank John Haltiwanger, Lawrence Katz, Till von Wachter, and Michael Wood-ford for useful discussions, and the Social Sciences and Humanities Research Council of Canada (SSHRC) for research support.