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.