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

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Author Info
Christian Grund () (University of Bonn and IZA Bonn)
Dirk Sliwka () (University of Cologne and IZA Bonn)

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Abstract

The impact of wage increases on job satisfaction is explored theoretically and empirically. To do this, we apply a utility function that rises with the absolute wage level as well as with wage increases. It is shown that when employees can influence their wages by exerting effort, myopic utility maximization directly implies increasing and concave shaped wage profiles. Furthermore, employees get unhappier over time staying on a certain job although 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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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1879.

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Length: 29 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:iza:izadps:dp1879

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Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany
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Related research
Keywords: job satisfaction wage increases wage profiles reference dependent utility habit formation loss aversion

Other versions of this item:

Find related papers by JEL classification:
M54 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Labor Management
J28 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Safety; Job Satisfaction; Related Public Policy
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executive Compensation

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    Other versions:
  3. Christopher D. Carroll & Jody Overland & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, vol. 90(3), pages 341-355, June. [Downloadable!] (restricted)
    Other versions:
  4. Christian Grund & Dirk Sliwka, 2003. ""The Further We Stretch the Higher the Sky" - On the Impact of Wage Increases on Job Satisfaction," Bonn Econ Discussion Papers bgse1_2003, University of Bonn, Germany. [Downloadable!]
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  8. Andrew Clark & Yannis Georgellis & Peter Sanfey, 1997. "Job Satisfaction, Wage Changes and Quits: Evidence from Germany," Studies in Economics 9711, Department of Economics, University of Kent.
    Other versions:
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  21. Joanne Salop & Steve Salop, 1976. "Self-selection and turnover in the labor market," Special Studies Papers 80, Board of Governors of the Federal Reserve System (U.S.).
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