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

29 Pages Posted: 14 Dec 2005

See all articles by Christian Grund

Christian Grund

RWTH Aachen University - School of Economics and Business Administration; IZA Institute of Labor Economics

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management; IZA Institute of Labor Economics

Date Written: December 2005

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.

Keywords: job satisfaction, wage increases, wage profiles, reference dependent utility, habit formation, loss aversion

JEL Classification: M54, J28, J30, M12

Suggested Citation

Grund, Christian and Sliwka, Dirk, Reference Dependent Preferences and the Impact of Wage Increases on Job Satisfaction: Theory and Evidence (December 2005). IZA Discussion Paper No. 1879. Available at SSRN: https://ssrn.com/abstract=870287

Christian Grund

RWTH Aachen University - School of Economics and Business Administration ( email )

Aachen
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Dirk Sliwka (Contact Author)

University of Cologne - Department of Business Administration and Human Resource Management ( email )

Koln, 50923
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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