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

48 Pages Posted: 22 Dec 2008

See all articles by Ernst Fehr

Ernst Fehr

University of Zurich - Department of Economics

Lorenz Goette

University of Lausanne; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Christian Zehnder

University of Lausanne

Multiple version iconThere are 4 versions of this paper

Abstract

In this paper, we argue that important labor market phenomena can be better understood if one takes (i) the inherent incompleteness and relational nature of most employment contracts and (ii) 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 only to exert 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: fairness, contracts, wages, effort, experiments

JEL Classification: C7, D00, D2, D8, J2, L2

Suggested Citation

Fehr, Ernst and Goette, Lorenz F. and Zehnder, Christian, A Behavioral Account of the Labor Market: The Role of Fairness Concerns. IZA Discussion Paper No. 3901. Available at SSRN: https://ssrn.com/abstract=1318860

Ernst Fehr (Contact Author)

University of Zurich - Department of Economics ( email )

Blümlisalpstrasse 10
Zuerich, 8006
Switzerland
+41 1 634 3709 (Phone)
+41 1 634 4907 (Fax)

Lorenz F. Goette

University of Lausanne ( email )

Department of Economics
Batiment Internef
Lausanne, 1015
Switzerland
(021) 692'3496 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org

Christian Zehnder

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

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