"Skill-biased remote work and incentives" with Fabio Cerina and Luca Deidda.
Abstract:
We document that, since the Covid-19 pandemic, performance pay has become increasingly common alongside remote work, especially in high-skill jobs, even within narrowly defined occupations. We develop a firm-worker model with moral hazard to show how workers’ skills shape the firm’s joint choice of work arrange- ments and incentive schemes. Since low-skill workers are less likely to achieve high performance, under risk aversion, they require larger performance premia. Therefore, the firm adopts performance pay only if the worker is sufficiently skilled, and fixed pay with monitoring otherwise. The unforeseen pandemic shock forces the firm to implement remote work, expanding the adoption of performance pay because monitoring is less effective remotely. Post-pandemic, the firm always retains remote work for high-skill workers paid on performance, and for low-skill workers only if remote monitoring remains sufficiently effective. The model thus predicts that a decline in the efficacy of remote monitoring reduces remote work among low-skill workers while leaving high-skill workers unaffected. We test this prediction with a Difference-in-Differences design that exploits the introduction of stricter electronic-monitoring regulation in New York State, and find strong support. Our findings suggest that regulations governing workplace monitoring shape firms’ choices over work arrangements and incentive structures.