Experimental investigations of the fair wage-effort hypothesis

Abstract

Neoclassical economic theory’s assumption of a strictly utility of money maximizing economic actor has been unable to explain such economic phenomena as involuntary unemployment and above market clearing wages. Efficiency wage theory, in its various forms, has provided some explanation for these labour market features. Akerlof’s (1982) Fair Wage-Effort Hypothesis or Partial Gift Exchange model of the labour market explains involuntary unemployment through the productivity enhancing effects of higher wages. In Akerlof’s model this is done through a sort of unspoken gift exchange in which higher wages given to the workers are returned to the firm in the form of higher effort or productivity. The Partial Gift Exchange model can also be modeled in a laboratory setting where its various predictions and assumptions can be tested. This has been done by a number of researchers over the last 15 years, who have generally found support for the validity of the theory using a one sided oral auction procedure. This thesis seeks to conduct a similar experiment, but in the form of a survey, the focus of which is the relationship between wages and effort. A number of the results of previous experiments supporting the Fair Wage-Effort Hypothesis have also been generated in the survey, for example a positive relationship between wages and effort. New and interesting findings not previously examined in the lab or not present in previous experiment were also present in the survey: the negative effect of wage inequity; a positive coefficient for the gender dummy variable; and the negative effect of unemployment insurance. The survey has produced some new and interesting results, transporting the survey back into the laboratory setting from which it was inspired would provide an interesting comparison.