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Professor Geraint Johnes
Professor of Economics at Lancaster University
T 020 7976 3516
Professor Geraint Johnes

The Director's Report - April Issue

Authors: Professor Geraint Johnes

11 April 2014

A recent report from the CIPD and LUMS, with input from the Work Foundation, examines the Changing Contours of Fairness. In the workplace, what is perceived to be fair or unfair is often the trigger for a whole variety of disputes and managerial headaches.

Fairness means different things in different contexts. A worker who perceives her own productivity to be greater than those of her peers might think that it is unfair if they are paid as much as she is paid herself. The whole workforce of an organisation might perceive a below-inflation pay rise to be unfair, in that it disadvantages them as a group relative to workers in other settings. Fairness is linked to motivation, and hence contributes to productivity. Yet if a commitment to fairness is misinterpreted as a synonym for equality, it can blunt incentives.

Economists have long struggled with the concept of fairness. Equity is defined by different people in different ways, reflecting value judgements. From utilitarianism to Rawls, a range of definitions serves every point on what maps onto the political spectrum. Many economists have given up thinking about fairness and focused exclusively on efficiency – adopting by default a utilitarian approach that is itself value laden.

And therein lies the rub. What we are now learning from economic psychologists and behavioural economists is that people have a view of fairness that is not served well by many existing economic models. Insights from experimental economics suggest that fairness – regardless of how woolly the definition of that concept might be – is something that really matters to people, and it matters in ways that are not served well by existing models. The ultimatum game – in which one player makes a proposal on how to share a given kitty with a second player, who must either accept or reject the proposal – is just one example where experimental work shows that people simply do not behave in the ways that might be anticipated from a perspective where fairness does not matter.

So if fairness matters to people, and all the evidence suggests that it does, then views of the world in which the focus of attention is purely on increasing narrow economic goals are misplaced. A world of atomistic decision-makers concerned only with their own gain is not the world in which we live. And that fundamentally challenges many of the assumptions upon which the scaffolding of our economic system is constructed.

Fairness is difficult to define, for sure, but employers that enshrine notions of fairness into their dealings with their workforce will ultimately find themselves well placed. The challenge, of course, is that fairness is something that is measured across many dimensions – there are all sorts of ways in which workers may deem their treatment unfair – and keeping tabs on all of them is not straightforward. Employing people is about so much more than the challenge of setting a price to equate supply and demand.

The recession of the last few years has been remarkable not only for its severity, but also for the relatively modest increase in the overall unemployment rate. But this has been achieved by employers offering workers fewer hours of work, and – in some industries in particular – with an increase in the amount of unpaid overtime that workers are expected to supply. How workers will, over the longer term, adjust to what they perceive to be a quality of work experience that is less than optimal is a matter of legitimate interest. Employers employ, and they have adjusted well to ensure that they could continue to do so during the recent hard times. With the recovery comes a responsibility for them to employ well, and to employ fairly and this will be the focus of two upcoming Work Foundation reports on low pay and productivity.