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Fairness perceptions and reservation wages - the behavioral effects of minimum wage laws


Falk, Armin; Fehr, Ernst; Zehnder, Christian (2006). Fairness perceptions and reservation wages - the behavioral effects of minimum wage laws. Quarterly Journal of Economics, 121(4):1347-1381.

Abstract

In a laboratory experiment we show that minimum wages have significant and lasting effects on subjects’ reservation wages. The temporary introduction of a minimum wage leads to
a rise in subjects’ reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the
minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity of paying less than a minimum wage previously introduced. It may further explain why employers often increase workers' wages after an increase in the minimum wage by an amount exceeding that necessary for compliance with the higher minimum. At a more general level, our results suggest that economic policy may affect people’s behavior by shaping the perception of what is a fair transaction and by creating entitlement effects.

In a laboratory experiment we show that minimum wages have significant and lasting effects on subjects’ reservation wages. The temporary introduction of a minimum wage leads to
a rise in subjects’ reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the
minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity of paying less than a minimum wage previously introduced. It may further explain why employers often increase workers' wages after an increase in the minimum wage by an amount exceeding that necessary for compliance with the higher minimum. At a more general level, our results suggest that economic policy may affect people’s behavior by shaping the perception of what is a fair transaction and by creating entitlement effects.

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52 citations in Web of Science®
58 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:December 2006
Deposited On:27 Mar 2009 14:20
Last Modified:05 Apr 2016 12:28
Publisher:MIT Press
ISSN:0033-5533
Additional Information:Copyright: MIT Press
Publisher DOI:10.1093/qje/121.4.1347
Permanent URL: http://doi.org/10.5167/uzh-3995

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