Perceptions of fairness play an important role in labor market relations and affect market efficiency. While most of the previous studies have focused on behavioral effects, the article “Unfair Pay and Health” by briq researchers Armin Falk, Fabian Kosse and co-authors shows a strong link between unfair pay and heart rate variability (HRV). HRV is a stress-related early indicator of impaired cardiac autonomic control which has been shown to predict coronary heart disease. The implications of these findings could be considerable. According to the Centers for Disease Control and Prevention, one in every three deaths in the U.S. is related to cardiovascular diseases.
The two economists and three medical sociologists developed a two-tiered study. First, they used a controlled principal-agent lab experiment to test how revenue allocation affected agents’ HRV. The experimenters further tested their hypothesis using observational data from the German Socio-Economic Panel (SOEP), a large panel study that is representative of the adult population of Germany. Going beyond behavioral effects (e.g. lower work morale), the researchers were looking for physiological responses – direct feedback from the body – to perceptions of unfair pay.
The findings were overwhelmingly similar between the two approaches. For the lab experiment, agents (or employees) produced revenue based on a tedious task (counting zeroes on a sheet of paper and entering the data into a computer). At the same time, principals (or employers) were free to do what they liked with that time. After the agent had “worked” for 25 minutes, the principal decided how to split the revenue between himself and his employee.
All subjects were male college students. In the end, no agent received more than the amount deemed to be objectively fair by a separate group of subjects. On average the workers produced a revenue of 20.93 euros and received a pay of 9.53 euros. Throughout the experiment, the researchers recorded the HRV of the agents. A low heart rate variability is observed during states of mental stress while enhanced heart rate variability occurs during states of mental relaxation. Analysis of the heart-rate data indicated that HRV reacts negatively toward being treated in a more unfair way, i.e., fairness systematically affects the autonomic nervous system.
In light of their findings, the authors focused on exploring diseases related specifically to the cardiovascular system. Using information from the SOEP, they found a strong association between perceptions of unfair compensation and lower subjective general health status. The SOEP data has respondent information about both general health outcomes and specific diseases, and about labor market status and their perceptions of the fairness of their pay. The data showed that unfair pay perceptions corresponded specifically to heart disease. No such relation is observed for other diseases, such as cancer, which are mostly unrelated to the cardiovascular system.
“The long-run findings exactly fit to what we find in the short-run in the lab,” Kosse says. “When both approaches fit that nicely together, I think it is very convincing.” Both models indicate significant negative effects of unfair wage on subjective health status. By their estimates, the effect of receiving an unfairly low wage on health status is equivalent to an increase in age between 2.5 and 10 years, and exceeds the effects of a 1,000-euro decrease in monthly net wage.
The study’s findings are significant for a number of reasons. Most aspects of low wages are part of the market, such as providing sub-par work and creating sub-par products. But when low wages have an effect on worker health, the associated costs have usually not been priced in the market, and thus poor worker health has costs for the whole society.
In addition to fairness, policymakers and workers now have another argument for demanding fair wages. “It’s not just unfair, it also has bad long-run outcomes concerning health,” Kosse says. Getting health costs under control, particularly for industrialized countries, is increasingly relevant as greater portions of the population enter old age. Coronary heart disease, along with major depression, is estimated to be the leading cause of life-years lost to premature death and years lived with disability worldwide.
In sum, the study shows that unfair pay not only reduces work morale, but can also affect the health status of the workforce.