Ebook The Macroeconomic Consequences of Reciprocity in Labor Relations
Reciprocity is a pervasive feature of labor relations. Workers care about fairness and are willing to reward a generous wage offer by their employer with a commensurate level of effort, even though providing effort by itself is costly and yields no immediate pecuniary benefits. Firms, in turn, understand workers’ propensity to reciprocate and take into account the effects of compensation on effort and productivity when setting wages. These are the provocative lessons of a vast literature ranging from surveys by Kahneman, Knetsch and Thaler (1986) or Bewley (1999) to laboratory experiments by Fehr and Falk (1999) or Fehr and Gächter (2002), to name just a few.
Is this message relevant and helpful for macroeconomics? Specifically, is a model economy featuring an explicit role for reciprocity in labor relations an interesting alternative representation of reality relative to more standard neo-classical perspectives or to traditional efficiency wage constructs? And if so, does such an alternative model help resolve some of the outstanding macroeconomic puzzles? This paper is an attempt at answering these two questions and thereby assessing the macroeconomic relevance of reciprocity in labor relations.
We build a stylized efficiency wage model founded on reciprocity and derive its general equilibrium implications. Our model is founded on Rabin’s (1993) introduction of fairness in game theory. Workers are assumed to face a 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 gift of the firm is defined in terms of the standard component of workers’ utility; and the gift of the worker in terms of the net profits of the firm. Firms, modeled as monopolistic competitors, only care for net profits but, understanding the benefit to be derived from a cooperative workplace, they take workers’ propensity to supply effort into account (as effort cannot be contracted directly).
Here, as always in an efficiency wage context, a firm’s wage offer is evaluated by workers on a relative basis, by comparison with a certain wage reference. Quite naturally, the wage reference emerging from reciprocity considerations depends not only on the worker’s outside option – a traditional external reference – but also – and this is new – on the firm’s profitability, an internal reference that one may associate with the notion of rent-sharing. What our analysis uncovers is that the effective weight placed on the firm’s ability-to-pay turns out to be crucial for the equilibrium properties of a reciprocity-based efficiency wage story, that is, the relative weight placed on the two components of the reference wage in the end determines the relevance of the contribution of reciprocity on macroeconomic equilibrium. This result should be taken as a call for more experimental and survey evidence on the relative subjective importance of the two dimensions of the wage reference.
The emphasis on rent sharing accords well with the message of the experimental and survey studies cited in our first paragraph. These studies indeed emphasize that both workers and firms view rent-sharing as an important determinant of the supply of effort: the better (worse) the firm is doing, the more (less) the worker expects to be paid in exchange for a given level of effort. A rent sharing view also rationalizes the results of panel data estimations, which consistently find various measures of firm performance to be significant and quantitatively important predictors of wages, even in the long run and after controlling for skill, working conditions, local labor market attributes and union presence.
Download
PDF Ebook The Macroeconomic Consequences of Reciprocity in Labor Relations
Posted in :
