revised version published in: Industrial and Labor Relations Review, 2007, 60 (4), 477-498
This paper draws on evidence from an internal attitude survey in the freight-handling
terminals of a unionized trucking firm to investigate the effect of local labor market conditions
on employee wage-fairness perceptions. The key element of our research design is that local
managers have no discretion to vary wage rates in response to local labor market conditions;
local economic shocks thus generate exogenous variation in the attractiveness of the wage
paid by the firm relative to employees’ options in the outside labor market. We find robust
associations between two indicators of local conditions – the rate of unemployment and the
wages of similar workers in the outside market – and the wage-fairness perceptions of
employees in the firm, which we argue reflects a causal relationship. As an extension, we
relate the changes in local conditions and fairness perceptions to changes in employee
performance, as measured by the rate of disciplinary dismissals. We find suggestive
evidence that increased local unemployment leads to improved employee performance, and,
conditional on a particular assumption about the mechanism through which local conditions
affect performance, that increases in wage-fairness perceptions lead employees to supply
more effort.
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