Working Paper: CEPR ID: DP6587
Authors: Jean-Pierre Danthine; Andre Kurmann
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
JEL Codes: E24; E31; E32; E52; J50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reciprocity in labor relations (J53) | wage determination (J31) |
| wage entitlement (J38) | productivity (O49) |
| rent sharing (D33) | productivity (O49) |
| neutral technology shock (E19) | inflation (E31) |
| neutral technology shock (E19) | nominal wage growth (J39) |
| reciprocity model (D16) | macroeconomic responses (E65) |