The business cycle implications of reciprocity in labor relations

A reciprocity-based model of wage determination is incorporated into a modern dynamic general equilibrium framework and estimated on U.S. data. The estimation reveals that rent-sharing (between workers and firms) and wage entitlement (based on past wages) are important determinants of wage setting for the model to fit the dynamic responses of output, 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 for wage setting. These results are consistent with micro-studies on reciprocity in labor relations but contrast with traditional efficiency wage models which emphasize aggregate labor market variables as the determinants of wage setting.