Vertical and Horizontal Comparisons and Mobility Outcomes: Evidence from the Swedish Microdata

Abstract

Using employer-employee matched data from Sweden between 2001 and 2008, we test hypotheses designed to assess the contingent nature of the relationship between wage inequality and cross-firm mobility. We propose that the effect of wage inequality depends on whether wage comparisons serve a comparative or a normative function. Our results show that same-level wage comparisons, which serve a primarily comparative goal, increase cross-firm mobility because they induce inequity concerns. By contrast, different-level wage comparisons, which serve a primarily normative goal, decrease cross-firm mobility because they enhance self-motivation. Moreover, we find that that the horizontal-inequality effect is amplified (mitigated) for bottom same-level wage earners, consistent with the notion of envy and relative deprivation. However, the vertical-inequality effect is amplified (mitigated) for top (bottom) different-level wage earners, consistent with the notion of self-motivation. Finally, the impact of vertical and horizontal wage inequality increases with workers’ social similarity. More broadly, the study contributes to our understanding of the contingent nature of wage inequality and mobility.