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Reference-Dependent Preferences and the Impact of Wage Increases on Job Satisfaction: Theory and Evidence

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  • Christian Grund
  • Dirk Sliwka

Abstract

We study the impact of wage increases on job satisfaction theoretically and empirically. To do this, we apply a utility function that rises with the absolute wage level as well as with wage increases. We show that when employees can influence their wages by exerting effort, myopic utility maximization directly implies increasing and concave wage profiles. Furthermore, employees become unhappier over time if they remain in the same job, even though wages increase. Using data from 19 waves of the German Socio-Economic Panel, we find empirical support for both the form of the utility function and the decreasing job satisfaction patterns.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 163 (2007)
Issue (Month): 2 (June)
Pages: 313-335

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200706)163:2_313:rpatio_2.0.tx_2-2

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Citations

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Cited by:
  1. Sarah Holly & Alwine Mohnen, 2012. "Impact of Working Hours on Work-Life Balance," SOEPpapers on Multidisciplinary Panel Data Research 465, DIW Berlin, The German Socio-Economic Panel (SOEP).
  2. John Smith, 2008. "Imperfect Memory and the Preference for Increasing Payments," Departmental Working Papers 200805, Rutgers University, Department of Economics.
  3. Pfeifer, Christian, 2009. "An Intra-Firm Perspective on Wage Profiles and Employment of Older Workers with Special Reference to Human Capital and Deferred Compensation," Hannover Economic Papers (HEP) dp-413, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  4. Grund, Christian & Martin, Johannes, 2012. "Monetary Reference Points of Managers: An Empirical Investigation of Status Quo Preferences and Social Comparisons," IZA Discussion Papers 7097, Institute for the Study of Labor (IZA).
  5. Smith, Jennifer C, 2013. "Pay Growth, Fairness and Job Satisfaction: Implications for Nominal and Real Wage Rigidity," CAGE Online Working Paper Series 130, Competitive Advantage in the Global Economy (CAGE).
  6. repec:cge:warwcg:129 is not listed on IDEAS
  7. Oshio, Takashi & Umeda, Maki & Fujii, Mayu, 2013. "The association of life satisfaction and self-rated health with income dynamics among male employees in Japan," Japan and the World Economy, Elsevier, vol. 28(C), pages 143-150.
  8. Sean Duffy & John Smith, 2013. "Preference for increasing wages: How do people value various streams of income?," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 8(1), pages 74-90, January.
  9. Luis Angeles, 2008. "Adaption or social comparison? The effects of income on happiness," Working Papers 2009_09, Business School - Economics, University of Glasgow, revised Jun 2009.
  10. Hammermann, Andrea & Mohnen, Alwine, 2012. "Who Benefits from Benefits? Empirical Research on Tangible Incentives," IZA Discussion Papers 6284, Institute for the Study of Labor (IZA).
  11. Takashi Oshio & Kunio Urakawa, 2014. "The Association Between Perceived Income Inequality and Subjective Well-being: Evidence from a Social Survey in Japan," Social Indicators Research, Springer, vol. 116(3), pages 755-770, May.
  12. Smith, John, 2009. "Cognitive dissonance and the overtaking anomaly: Psychology in the principal-agent relationship," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(4), pages 684-690, August.
  13. Oshio, Takashi & Umeda, Maki & Fujii, Mayu, 2012. "The association between income dynamics and subjective well-being: Evidence from career income records in Japan," CIS Discussion paper series 564, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  14. Oshio, Takashi & Urakawa, Kunio, 2013. "The association between perceived income inequality and subjective well-being: Evidence from a social survey in Japan," CIS Discussion paper series 579, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  15. Christian Pfeifer, 2009. "Adjustment of Deferred Compensation Schemes, Fairness Concerns, and Hiring of Older Workers," Working Paper Series in Economics 151, University of Lüneburg, Institute of Economics.
  16. Pouliakas, Konstantinos & Theodossiou, Ioannis, 2005. "Socio-Economic Differences in the Satisfaction of High-Pay and Low-Pay Jobs in Europe," MPRA Paper 16733, University Library of Munich, Germany, revised 10 Aug 2009.

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