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A behavioral account of the labor market: the role of fairness concerns


Fehr, Ernst; Goette, Lorenz; Zehnder, Christian (2009). A behavioral account of the labor market: the role of fairness concerns. Annual Review of Economics, 1(1):355-384.

Abstract

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.

Abstract

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.

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Additional indexing

Item Type:Journal Article, not refereed, further contribution
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:September 2009
Deposited On:22 Feb 2010 10:42
Last Modified:05 Apr 2016 13:34
Publisher:Annual Reviews
ISSN:1941-1383
Publisher DOI:https://doi.org/10.1146/annurev.economics.050708.143217
Related URLs:http://dx.doi.org/10.1146/annurev.economics.050708.143217 (Publisher)

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