A: A company is making a small profit. It is located in a community experiencing a recession with substantial unemployment but no inflation. May workers are anxious to work at the company. The company decides to decrease wages and salaries by 7% this year.

B: A company is making a small profit. It is located in a community experiencing a recession with substantial unemployment and an inflation rate of 12%. May workers are anxious to work at the company. The company decides to increase wages and salaries by 5% this year.

When surveyed about case A, 62% of respondents said that the company's behavior was unfair. Of those surveyed on case B, only 22% thought the behavior was unfair. Of course, in real income terms, the situations are identical.[1][2]

Not too surprising, but its nice to see that at least a few economists are interested in examining the idea of man as a non-self-interest-maximizing creature. Maybe inflation actually does some good as a way of assuaging the sheep's egos by letting employers drop their wages without them feeling like they are earning less.

[1] Indirect source: "Smart Money Decisions" by Max Bazerman, a fabulous book on how human irrationality affects common financial decisions.

[2] Actual study: Kahneman, Knetsch, and Thaler (1987), "Fairness as a constraint on profit seeking: Entitlements in the market", American Economic Review, 76, 728-741

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