The Business Cycle Implications of Reciprocity in Labour Relations

Jean-Pierre Danthine () and Andre Kurmann ()

No 6587, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a reciprocity-based model of wage determination and incorporate it into a modern dynamic general equilibrium framework. We estimate the model and find that, among potential determinants of wage policy, rent-sharing (between workers and firms) and a measure of wage entitlement are critical to fit the dynamic responses of hours, wages and inflation to various exogenous shocks. Aggregate employment conditions (measuring workers' outside option), on the other hand, are found to play only a negligible role in wage setting. These results are broadly consistent with micro-studies on reciprocity in labour relations but contrast with traditional efficiency wage models which emphasize aggregate labour market variables as the main determinant of wage setting. Overall, the empirical fit of the estimated model is at least as good as the fit of models postulating nominal wage contracts. In particular, the reciprocity model is more successful in generating the sharp and significant fall of inflation and nominal wage growth in response to a neutral technology shock.

Keywords: Efficiency wages; Estimated DSGE models; Reciprocity (search for similar items in EconPapers)
JEL-codes: E24 E31 E32 E52 J50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge, nep-lab and nep-mac
Date: 2007-11

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Related works:
Working Paper: The Business Cycle Implications of Reciprocity in Labor Relations (2007)
Working Paper: The Business Cycle Implications of Reciprocity in Labor Relations (2007)
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