Wage Generosity

Actual wages typically exceed collectively set standard wages. Standard wages are, therefore, not binding, yet they seem to influence actual wages strongly. An explanation for this phenomenon is offered along the lines of the Fair Wage/Effort Hypothesis proposed by G. Akerlof and J. Yellen (1990). It is argued that it is precisely when collectively set wages are relatively unimportant for perceptions of fairness at the firm level, that large wage mark-ups emerge. The general point seems to be that the results of economic modeling may react very sensitively to the customary suppression of "non-economic" factors.