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.