A Behavioral Account of the Labor Market: The Role of Fairness Concerns

By Ernst Fehr, Lorenz F. Goette, Christian Zehnder. Social Science Research Network, 2008

338 citations recorded by the source corpus.

In this paper, we argue that important labor market phenomena can be better understood if one takes (a) the inherent incompleteness and relational nature of most employment contracts and (b) the existence of reference-dependent fairness concerns among a substantial share of the population into account. Theory shows and experiments confirm that, even if fairness concerns were to exert only weak effects in one-shot interactions, repeated interactions greatly magnify the relevance of such concerns on economic outcomes. We also review evidence from laboratory and field experiments examining the role of wages and fairness on effort, derive predictions from our approach for entry-level wages and incumbent workers’ wages, confront these predictions with the evidence, and show that reference-dependent fairness concerns may have important consequences for the effects of economic policies such as minimum wage laws.

Subfields: Demography, Economics and Econometrics, Safety Research

View Paper: https://www.semanticscholar.org/paper/97bf2b4b2dc216f994b1d04f6576c776d90ef1f0

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Citations in the corpus

Lost in Translation? The Effect of Cultural Values on Mergers Around the World (2015, background): “For instance, preferences for fairness can affect an individual’s choice of occupation and wage contracts (Bartling, Fehr, Maréchal, and Schunk, 2009; Fehr, Goette, and Zehnder, 2009), as can preferences for social esteem (Ellingsen and Johannesson, 2007, 2008).”
Behavioral Contract Theory (2014, background): “Motivated by Fehr et al. (2007), suppose that a proportion q of individuals in society are inequity averse as above, but a proportion 1 − q are selfish.”
Behavioral Economics and Psychology of Incentives (2012, background): “Although those factors are certainly as important as the ones I consider here, I do not discuss them since Fehr et al. (2009) review the relevant literature in the first volume of this journal.”
An opportunity cost model of subjective effort and task performance (2013, neutral): “Subjects’ decisions to comply can be affected by the amount of effort that is appropriate given the compensation they expect to receive (Akerlof & Yellen 1990; Fehr et al. 2009).”
The Morale Effects of Pay Inequality (2016, neutral): “For reviews of this literature, see Fehr et al. (2009), List (2009), and Charness and Kuhn (2011).”