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

Author

Listed:
  • Ernst Fehr
  • Lorenz Goette
  • Christian Zehnder

    () (Institute for Empirical Research in Economics, University of Zurich, CH-8006 Zurich, Switzerland
    Department of Economics, University of Geneva, CH-1211 Geneva, Switzerland
    Faculty of Business and Economics (HEC), University of Lausanne, CH-1015 Lausanne, Switzerland)

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.

Suggested Citation

  • Ernst Fehr & Lorenz Goette & Christian Zehnder, 2009. "A Behavioral Account of the Labor Market: The Role of Fairness Concerns," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 355-384, May.
  • Handle: RePEc:anr:reveco:v:1:y:2009:p:355-384
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev.economics.050708.143217
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    Keywords

    labor market; fairness; gift exchange; relational contracts; wage rigidity;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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