The business cycle implications of reciprocity in labor relations

►A dynamic stochastic general equilibrium framework with a reciprocity-based model of wage setting is capable of generating the responses of prominent macroeconomic aggregates to monetary and technology shocks. ► The reference compensation level determining the worker's reciprocity level for a given wage is estimated to depend on rent-sharing (between workers and firms) and wage entitlement (based on past wages). ► Aggregate employment conditions (measuring the worker's outside option) are found to play only a negligible role for wage setting. ► The estimates of the reciprocity-based model of wage setting based on macroeconomic data are consistent with microeconomic studies on reciprocity in labor relations.