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

Author

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  • Grund, Christian

    (RWTH Aachen University)

  • Sliwka, Dirk

    (University of Cologne)

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.

Suggested Citation

  • Grund, Christian & Sliwka, Dirk, 2005. "Reference Dependent Preferences and the Impact of Wage Increases on Job Satisfaction: Theory and Evidence," IZA Discussion Papers 1879, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp1879
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    More about this item

    Keywords

    habit formation; loss aversion; reference dependent utility; wage profiles; wage increases; job satisfaction;
    All these keywords.

    JEL classification:

    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - 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; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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