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

Ernst Fehr, Lorenz Goette and Christian Zehnder

Annual Review of Economics, 2009, vol. 1, issue 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.

Keywords: labor market; fairness; gift exchange; relational contracts; wage rigidity (search for similar items in EconPapers)
JEL-codes: C78 D63 J31 J41 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (186)

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