1990 TheFairWageEffortHypothesisandU

• (Akerlof & Yellen, 1990) ⇒ George A Akerlof, and Janet L Yellen. (1990). “The Fair Wage-effort Hypothesis and Unemployment.” The Quarterly Journal of Economics CV, 2. doi:10.2307/2937787

Subject Headings: Fair Wage; Fair Wage-Effort Hypothesis; Tit for Tat

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Abstract

This paper introduces the fair wage-effort hypothesis and explores its implications. This hypothesis is motivated by equity theory in social psychology and social exchange theory in sociology. According to the fair wage effort hypothesis, workers proportionately withdraw effort as their actual wage falls short of their fair wage. Such behavior causes unemployment and is also consistent with observed cross-section wage differentials and unemployment patterns.

I. INTRODUCTION

This paper explores the consequences of a hypothesis concerning worker behavior, which we shall call the fair wage–effort hypothesis. According to this hypothesis, workers have a conception of a fair wage; insofar as the actual wage isthe fair wage, workers supply a corresponding fraction of normal effort. If [math]\displaystyle{ e }[/math] denotes effort supplied, [math]\displaystyle{ w }[/math] the actual wage, and [math]\displaystyle{ w^* }[/math] the fair wage, the fair wage–effort hypothesis says that

[math]\displaystyle{ e = \textbox{min}(w/w^*,1), (1) }[/math]

where effort is denoted in units such that 1 is normal effort. This hypothesis explains the existence of unemployment. Unemployment occurs when the fair wage [math]\displaystyle{ w^* }[/math] exceeds the market-clearing wage. With natural specifications of the determination of [math]\displaystyle{ w^* }[/math], this hypothesis may explain why skill and unemployment are negatively correlated. In addition, it potentially explains wage differentials and labor market segmentation.

The motivation for the fair wage–effort hypothesis is a simple observation concerning human behavior: when people do not get what they deserve, they try to get even. The next section will present five types of evidence for the fair wage–effort hypothesis. First, it will draw on psychology, where the fair wage–effort hypothesis corresponds to Adams’ [1963] theory of equity. Numerous empirical studies have tested this theory. They are, on balance, strongly supportive. Second, in sociology the fair wage–effort hypothesis corresponds to the Blau-Homans [1955, 1961] theory of social exchange. Sociological studies, including studies of work situations, show that equity usually prevails in social exchange. Third, the fair wage–effort hypothesis accords with common sense. It appears frequently in literature; it is considered obvious by personnel textbooks; and it explains commonly observed taboos regarding discussion of wages and salaries. Fourth, the fair wage–effort hypothesis explains wage compression among individuals with different skills. Fifth, simple models of the fair wage–effort hypothesis potentially explain empirically observed unemployment-skill correlations; they also explain why unemployment has not fallen with the rise in education despite lower unemployment of more educated workers.

References

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	Author	volume	Date Value	title	type	journal	titleUrl	doi	note	year
1990 TheFairWageEffortHypothesisandU	George A Akerlof Janet L Yellen			The Fair Wage-effort Hypothesis and Unemployment				10.2307/2937787		1990