Maybe not as much as you might think:
We introduce flexible incentive contracts to model inflation and unemployment conditions. Our main result is that the wage cycle from benefits does not affect the slope of the Phillips curve for prices and does not moderate the volatility of unemployment. The dynamic response of unemployment in variable-wage, procyclical economies is first-order equivalent to that in fixed-wage economies. Accordingly, the slope of the Phillips curve is the same for both economies. This equilibrium is due to the flexibility of effort, which makes effective costs difficult even if wages are flexible. Our estimated model suggests that 46% of the earnings cycle in the data comes from benefits, with the remainder resulting from negotiation of external options. The standard model without compensations adjusted to weakly active wages is similar to the unemployment response in our compensation payment model adjusted to strong active wages.
That appears in an interesting new paper by Meghana Gaur, John Grigsby, Jonathon Hazell, and Abdoulaye Ndiaye. My take is that effort is often related to personality and attitude, and thus the results are more adaptive than this paper suggests. Still, this is an interesting result worth considering.
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