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The Business Cycle Implications of Reciprocity in Labor Relations

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  • Jean-Pierre Danthine
  • André Kurmann

Abstract

We develop a reciprocity-based model of wage determination and incorporate it into a moder 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 labor relations but contrast with traditional efficiency wage models which emphasize aggregate labor 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.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0743.

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Date of creation: 2007
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Handle: RePEc:lvl:lacicr:0743

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Keywords: Efficiency wages; Reciprocity; Estimated DSGE models;

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Cited by:
  1. Jean-Pierre Danthine & André Kurmann, 2007. "The Business Cycle Implications of Reciprocity in Labor Relations," Cahiers de recherche, CIRPEE 0743, CIRPEE.
  2. Driscoll, John C. & Holden, Steinar, 2014. "Behavioral Economics and Macroeconomic Models," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2014-43, Board of Governors of the Federal Reserve System (U.S.).
  3. Matthieu Chemin & Joost DeLaat & André Kurmann, 2011. "Reciprocity in Labor Relations: Evidence from a Field Experiment with Long-Term Relationships," Cahiers de recherche, CIRPEE 1127, CIRPEE.
  4. Andrea Vaona, 2013. "Inflation gifts and endogenous growth through learning-by-doing," Working Papers 09/2013, University of Verona, Department of Economics.

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