Average hourly real wage series from the Labor Productivity and Costs (LPC) program and the Current Employment Statistics (CES) program have evolved very differently over the past decades. While the LPC wage has grown consistently over time and become markedly more volatile since the mid-1980s,...

This paper considers a real business cycle model with labor search frictions where two types of incentive pay are explicitly introduced following the insights from the micro literature on performance pay (e.g. Lazear, 1986). While in both schemes workers and firms negotiate ahead of time-t...