With the growth of the literature on incentive compensation has come the belief by some that incentive pay may be less rigid than pay that is not designed to effect incentives. Some have gone so far as to argue that this may explain differences in unemployment rates across countries. it is shown that there is no direct link between incentives and wage rigidity. Many compensation schemes that provide incentives have the reverse effect: That is, they tend to make wages more rigid than would be the case were incentives not an issue atall. This paper explores the relationship between wage rigidity and the provision of incentives in a variety of circumstances.

We are quick to add, however, that the difference in estimated OJT across the two groups is not large in 1966. In fact, H(1966)ID=1 H(1966)|D=O = $0.55 (with a standard error of $0.67) so that the difference is relatively small and the standard error is quite large. The conclusion is then that for this early period, the measured wage differential underestimates the true differential, but the extent of that understatement is questionable. [p. 559]