DP5174 The Macroeconomic Consequences of Reciprocity in Labour Relations

Author(s): Jean-Pierre Danthine, André Kurmann
Publication Date: August 2005
Keyword(s): efficiency wages, reciprocity, rent-sharing, wage rigidity
JEL(s): E24, E32, J50
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5174

We develop and analyse a structural model of efficiency wages founded on reciprocity. Workers are assumed to face an explicit trade-off between the disutility of providing effort and the psychological benefit of reciprocating the gift of a wage offer above some reference level. The model provides a rationale for rent sharing -- a feature that is very much present in the data but absent from previous formulations of the efficiency wage hypothesis. This firm-internal perspective on efficiency wages has important macroeconomic consequences: rent-sharing considerations promote wage rigidity, internal amplification and asymmetric responses to technology and demand shocks.