Working Paper: NBER ID: w5624
Authors: Julio J. Rotemberg
Abstract: This paper builds a simple model where there is a link between employees' perception of the fairness of employers and the actual distribution of income. Wages are based in part on employers' assessments of the productivity of individual employees. I show that the equilibrium distribution of income depends on the beliefs of employees concerning the accuracy of these evaluations. I give conditions under which the distribution of income across employees of the same vintage is more equal if employees believe that these evaluations are generally inaccurate (so that they are skeptical of capitalists in general) than when they believe that these evaluations are accurate. The model is consistent with the fact that, in a sample of seven countries, the distribution of income is more unequal in countries where people feel that income inequality is not too large.
Keywords: income distribution; employee perceptions; wage inequality; fairness; productivity
JEL Codes: D31; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| perceived accuracy of evaluations (C52) | income distribution (D31) |
| employees' beliefs about evaluation accuracy (C52) | wage inequality (J31) |
| perceived accuracy of evaluations (C52) | wage offers (J31) |
| perceived evaluations (D91) | decision to leave firms (M51) |
| decision to leave firms (M51) | wage levels (J31) |
| wage offers (J31) | income distribution (D31) |
| perceived excessive income inequality (D31) | actual income inequality (D31) |