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

Christian Grund and Dirk Sliwka ()
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Dirk Sliwka: University of Cologne

No 1879, IZA Discussion Papers from Institute of Labor Economics (IZA)

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: habit formation; loss aversion; reference dependent utility; wage profiles; wage increases; job satisfaction (search for similar items in EconPapers)
JEL-codes: J28 J30 M12 M54 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2005-12
New Economics Papers: this item is included in nep-cbe, nep-hrm, nep-lab and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published - published in: Journal of Institutional and Theoretical Economics, 2007, 163 (2), 313-335

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Journal Article: Reference-Dependent Preferences and the Impact of Wage Increases on Job Satisfaction: Theory and Evidence (2007)
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