閤 The Fair wage-Effort Hypothesis and Unemployment OR。 George A Akerlof, Janet L. Yellen The Quarterly Journal of Economics, Vol. 105, No. 2.(May, 1990), pp. 255-283 Stable url: http://inksistor.org/sici?sic0033-5533%028199005%29105%03a2%03c255%03atfwhau%3e2.0.co%3b2-q The Quarterly Journal of Economics is currently published by The MIT Press Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/about/terms.htmlJstOr'sTermsandConditionsofUseprovidesinpartthatunlessyouhaveobtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the jsTOR archive only for your personal, non-commercial use Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at Each copy of any part of a JSTOR transmission must contain the same copyright notice that ap on the screen or printed page of such transmission STOR is an independent not-for-profit organization dedicated to and preserving a digital archive of scholarly journals. For more information regarding JSTOR, please contact support @jstor. org Thu mar1522:21:552007
The Fair Wage-Effort Hypothesis and Unemployment George A. Akerlof; Janet L. Yellen The Quarterly Journal of Economics, Vol. 105, No. 2. (May, 1990), pp. 255-283. Stable URL: http://links.jstor.org/sici?sici=0033-5533%28199005%29105%3A2%3C255%3ATFWHAU%3E2.0.CO%3B2-Q The Quarterly Journal of Economics is currently published by The MIT Press. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/journals/mitpress.html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is an independent not-for-profit organization dedicated to and preserving a digital archive of scholarly journals. For more information regarding JSTOR, please contact support@jstor.org. http://www.jstor.org Thu Mar 15 22:21:55 2007
THE QUARTERLY JOURNAL OF ECONOMICS Vol. CV May 1990 Issue 2 THE FAIR WAGE-EFFORT HYPOTHESIS AND UNEMPLOYMENT* GEORGE A. AKERLOF AND jANET L. YELLEN This paper introduces the fair wage-effort hypothesis and explores its implica tions. This hypothesis is motivated by equity theory in social psychology and social exchange theory in sociology. According to the fair wage-effort hypothesis, worker 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 . INtROdUCTION This paper explores the consequences of a hypothesis concern g worker behavior, which we shall call the fair wage-effort tion of a fair wage; insofar as the actual wage is less than the fair wage, workers supply a corresponding fraction of normal effort. If e denotes effort supplied, w the actua fair wage-effort hypothesis says that =min(u/u*,1), where effort is denoted in units such that i is normal effort This We would like to thank Samuel Bowles, Daniel Kahneman under grant numbers SES 86-005023 and sEs 88-07807 administered by the titute for Business and Economic Research at the University of califo Akerlof and Yellen [ 1988] contains a summary of the results obtained in this e 1990 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology. The quarterly Journal of Economics, May 1990
256 QUARTERLY JOURNAL OF ECONOMICS hypothesis explains the existence of unemployment. Unemploy ment occurs when the fair wage w* exceeds the market-clearing wage. With natural specifications of the determination of w*, this hypothesis may explain why skill and unemployment are negatively correlated. In addition, it potentially explains wage differentials and labor market segmentation. 3 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. Numer- ous empirical studies have tested this theory. They are, on balance, strongly supportive. Second, in sociology the fair wage-effort hypoth esis corresponds to the Blau-Homans [1955, 1961] theory of social exchange. Sociological studies, including studies of work situations, how 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 extbooks; and it explains commonly observed taboos regarding iscussion 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 hypothe sis 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 Having reviewed the evidence for the fair wage-effort hypothe sis, Sections III and IV construct models using this hypothesis These models differ in the determination of the fair wage w*. I Section III w* is exogenous. In Section Iv w* depends on relative wages as well as on market forces. These models provide efficiency wage explanations for unemployment. Yet they are not subject to the criticism that bonding schemes or complicated contracts wi reduce or eliminate involuntary unemployment. If such bonds are considered unfair then they will not be optimal In relations where fairness is important, grudges due to past events lead to potential 2. For evidence of d 4. For reviews of this literature and the problems with efficiency wage models, [1987], and Yellen [198
THE FAIR WAGE-EFFORT HYPOTHESIS future reprisals. In the existing literature this model most closely resembles Summers'[1988] relative wage-based efficiency wage theory. In Summers' model workers compare their own compensa tion with that of comparable groups in other firms; in our model, in contrast, workers compare their pay with that of coworkers in the same hrm II. MOTIVATION FOR THE FAIR WAGE-EFFORT HYPOTHESIS A. Equity Theory dams [1963] hypothesized that in social exchange between two agents the ratio of the perceived value of the the perceived value of the "outcomes"would be equal. In a labor exchange the"input "of the employee is the perceived value of his labor, and the"outcome"is the perceived value of his remunera tion. On the firms side the input is the perceived value of th remuneration, and the outcome is the perceived value of the labor. In the context of a wage contract, Adams formula says that the perceived value of the labor input will equal the perceived value of the remuneration This formula can be translated into economic notation to say that the number of units of effective labor input (denoted e for effort)times the perceived value of a unit of effective labor(denoted w*)will equal the perceived value of remuneration (denoted w). In other words We wish to emphasize that w*, the perceived value of a unit of labor, will be the fair wage, and not the market-clearing wage According to psychologists, with both w and w* fixed, workers who do not receive a fair wage for input of effort e= 1 may change actual effort e, or they may change their perceived effort. similarly, they may change their perceived level of remuneration(by rede- fining the nonpecuniary terms of the job). In the theory below, we shall assume that when wages are underpaid workers adjust actual rather than perceived efforts or the perceived value of the nonpecu nary returns to the job Psychological experiments have mainly concentrated on disco ering whether individuals who are overpaid will increase their effort input since psychologists consider this the surprising prediction of Adams'theory. They consider it obvious that agents who feel underrewarded will supply correspondingly fewer inputs [Walster, Walster, and Berscheid, 1977 p 42]. As might be expected, overre-
QUARTERLY JOURNAL OF ECONOMICS ents yield ambiguous results. It has been (Walster, Walster, and Berscheid, 1977, p 124] that this ambiguity occurs because it is less costly for overpaid agents to increase the psychological evaluation of their labor inputs than to increase actual input. These experimental results are consistent with the hypothesis that overpayment does not increase input, and thus that While much less work has been done on underpaid subjects, several studies have obtained supportive results. In one revealing study Lawler and O' Gara [1967] compared the performance of workers who were paid the"going " rate of 25 cents per interview with the performance of interviewers who were seriously underpan at the rate of 10 cents per interview. The underpaid interviewers conducted far more interviews that were on average of significantly lower quality. Psychologically the lower paid interviewers also had reduced self-esteem--suggesting that workers adjust not only the amount of effort but also their perception of the quality of the labor input when equity is not realized. In a clever experiment Pritchard, Dunnette, and Jorgenson [1972] hired men to work for a fictitious Manpower firm they ealistically set up for their experiment. After the workers had been at work for three days, the firm announced a change in their method of pay. Subjects'earnings were variously adjusted upward or downward. Those subjects with downward adjustments expresse considerable job dissatisfaction on a questionnaire and also per formed less well in their work after the change In a similar experiment Valenzi and Andrews [1971] hired workers at $1.40 per hour, but then announced that, due to the budgetary process involving their grant from the National Institute of Mental Health orkers would receive more than the stipulated $1.40, and some would receive less. Twenty-seven percent of those who were given the lower wage of $1.20 quit immediately-a result consistent with an upward sloping labor supply curve but also explained by the workers anger at their unfair treatment In what is probably the most revealing experiment, Schmitt and Marwell [1972] gave workers a choice: whether to work coopera tively in pairs or to work alone. When pay was equal, workers chose to work in pairs. However, workers were willing to sacrifice signif cant earnings to work alone when the pay in pairs was unequa consider this implication of equity theory obvious; some expe alerta tive e planations tradodtmoans and friede ry, but in all cases there are easy man,1971]