Relative Income and Pay Satisfaction: Further Evidence on the Role of the Reference Group

Abstract

Social comparison is an important issue in the context of subjective well-being. Subjective well-being, including satisfaction with pay, is not only affected by individual salary but also by the salaries of members of a reference group. This paper studies the relationship between relative wage and pay satisfaction allowing the choice of reference group to vary across individuals. The paper utilizes a survey on working conditions and quality of working life that contains questions regarding the individual’s choice of reference group for income comparisons. The results indicate that even after controlling for reference group choice, both absolute and relative pay are significantly related to satisfaction with pay. Allowing the reference group to vary improves the overall performance of the model, however. We also present evidence that questions regarding relative pay are good predictors of satisfaction with pay.

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Notes

  1. 1.

    Indeed, Luxembourgish natives make up less than one third of the labor force.

  2. 2.

    The survey, “Working Conditions and the Quality of Working Life,” was conducted under a contract with the Luxembourg Ministry of Social Security.

  3. 3.

    Sampled workers received a letter at their home address inviting them to take part in the survey.

  4. 4.

    Let Pi,j be the probability of individual “i” choosing reference group “j” and Wj be the average wage in reference group j. Then the predicted wage for individual i is the sum of Pi,jWj over all groups j.

  5. 5.

    To proxy Y* for the “relatives/friends” group, we compute, through DADS files, the average salary of French employees in the area of residence of French cross-border workers. Because the salary in Luxembourg is, on average, higher than the salary in France, Y/Y* is always higher than one. For example, on average, in 2013, the gross annual remuneration of full-time employees in the industrial and service sectors was 55,393 euros in Luxembourg and 31,151 euros in Lorraine (region where French cross-border workers live) (http://www.grande-region.lu/portal/donnees/revenus-et-prix/revenus/gains-annuels-moyens-bruts-des-travailleurs-a-temps-plein-par-sexe-et-branche).

  6. 6.

    Note that the average relative income value for the “don’t know” respondents lies between the values for the “disagree” and “agree” respondents, consistent with the other comparative results.

  7. 7.

    Calculation of the adjusted R-squared yields the same conclusion.

  8. 8.

    Coefficients for the variables used in the reference group equations are available from the authors upon request.

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Acknowledgements

This work is supported by the visiting scholar scheme at the Luxembourg Institute of Socio-Economic Research. Williams is grateful for support from this program.

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Correspondence to Laetitia Hauret.

Appendix

Appendix

See Table 6.

Table 6 Coefficients from pay satisfaction equation (Ordered logit): model 6

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Hauret, L., Williams, D.R. Relative Income and Pay Satisfaction: Further Evidence on the Role of the Reference Group. J Happiness Stud 20, 307–329 (2019). https://doi.org/10.1007/s10902-017-9950-2

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Keywords

  • Job satisfaction
  • Pay satisfaction
  • Reference group
  • Relative wage