In conventional economic theory, the supply of labor is determined by the balance between the attractiveness of wages and the unpleasantness of work. Each worker responds only to his/her own wages and work situation, and is indifferent to the circumstances of others. This article proposes a hypothesis, widely accepted by psychologists and sociologists, that people are motivated by perceptions of fairness. In the labor market, if wages are reduced below the level that workers consider fair, they will reduce their effort on the job proportionally. The “fair wage-effort hypothesis” may explain the negative correlation between skill and unemployment; in addition, it can explain wage differentials and labor market segmentation.
