This paper is an attempt to test the hypothesis that utility depends on income relative to a 'comparison' or reference level. Using data on 5,000 British workers, it provides two findings. First, workers' reported satisfaction levels are shown to be inversely related to their comparison wage rates. Second, holding income constant, satisfaction levels are shown to be strongly declining in the level of education. More generally, the paper tries to help begin the task of constructing an economics of job satisfaction.

The economics of organizations is replete with the pitfalls of monetary rewards and punishments to motivate workers. If economic incentives do not work, what does? This paper proposes that workers’ self-image as jobholders, coupled with their ideal as to how their job should be done, can be a major work incentive. It shows how such identities can flatten reward schedules, as they solve the “principal-agent” problem. The paper also identifies and explores a new tradeoff: supervisors may provide information to principals, but create rifts within the workforce and reduce employees ’ intrinsic work incentives. We motivate the theory with examples from the classic sociology of military and civilian organizations.

Starting from the theoretical argument underlying the "hump shape" hypothesis, the paper investigates the various dimensions of centralisation in the wage formation process. The diversity of effects discussed in the paper makes it hard to arrive at unambiguous policy conclusions. Careful analysis of the various features and economy-wide direct as well as indirect effects of the degree of centralisation in the wage formation process suggests that there exist various trade-offs, the most important of which appears to be that between real wage restraint and relative wage flexibility: centralisation favours the former but reduces the latter. This suggests that its effect on macroeconomic performance depends on the type of shocks affecting the economy. Cette étude analyse les divers aspects de la centralisation dans le processus de formation des salaires en s’appuyant sur l’hypothèse théorique de "courbe en U inversée". La diversité des effets analysés rend ambigu les conclusions politiques qui peuvent être tirées de ce papier. Une étude minutieuse des divers aspects de la centralisation et de leurs effets tant directs qu’indirects, sur le processus de formation des salaires suggère qu’il existe différent choix d’objectifs, le plus important semble être entre la contrainte de salaire réel et la flexibilité du salaire relatif: la centralisation favorise le premier et affaiblit le second. Ceci suggère que l’impact sur la performance macro-économique dépend du type de choc affectant l’économie.

Economists usually assume that monetary incentives improve performance, and psychologists claim that the opposite may happen. We present and discuss a set of experiments designed to test these contrasting claims. We found that the effect of monetary compensation on performance was not monotonic. In the treatments in which money was offered, a larger amount yielded a higher performance. However, offering money did not always produce an improvement: subjects who were offered monetary incentives performed more poorly than those who were offered no compensation. Several possible interpretations of the results are discussed. I.

Abstract —In spite of the large and growing importance of the employer size-wage premium, previous attempts to account for this premium using observable worker or employer characteristic s have had limited success. The problem is that, while most theoretical explanation s for the size-wage premium are based on the matching of employers and employees, previous empirical work has relied on either worker surveys with little information about the employer, or establishmen t surveys with little information about the workers. In contrast, this study uses the newly created Worker-Establishment Characteristic Database, which contains linked employeremployee data for a large sample of U.S. manufacturing workers and establishments, to examine seven explanation s for the employer size-wage premium. A number of the explanation s can account for some of the observed cross-sectiona l variation in worker wages. However, none of the explanations can fully account for the employer size-wage premium. In the end there remains a large, signi � cant, and unexplained premium paid to workers of large employers. I.

of the process) for helpful comments. 1 Behavioral economics increases the explanatory power of economics by providing it with more realistic psychological foundations. This book consists of representative recent articles in behavioral economics. 1 This chapter is intended to provide an introduction to the approach and methods of behavioral economics, and to some of its major findings, applications, and promising new directions. It also seeks to fill some unavoidable gaps in the chapters ’ coverage of topics. What Behavioral Economics Tries To Do At the core of behavioral economics is the conviction that increasing the realism of the psychological underpinnings of economic analysis will improve economics on its own terms--generating theoretical insights, making better predictions of field phenomena, and suggesting better policy. This conviction does not imply a wholesale rejection of the neoclassical approach to economics based on utility maximization, equilibrium, and efficiency. The neoclassical approach is useful because it provides economists with a theoretical framework that can be applied to almost any form of economic (and even non-economic) behavior, and it makes refutable predictions. Many of these predictions are tested in the chapters of this book, and rejections of those predictions suggest new theories. Most of the papers modify one or two assumptions in standard theory in the direction of greater psychological realism. Often these departures are not radical at all because they relax simplifying assumptions that are not central to the economic approach. For example, there is nothing in core neoclassical theory that specifies that people should not care about fairness, that they should weight risky outcomes in a linear fashion, or that they must discount the future exponentially at a constant rate. 2 Other assumptions simply acknowledge human limits on 1 Since it is a book of advances, many of the seminal articles which influenced those collected here are not included, but are noted below and are widely reprinted elsewhere.

This paper develops an efficiency-wage model where input prices affect the equilibrium rate of unemployment. We show that a simple framework based on only two prices (the real price of oil and the real rate of interest) is able to explain the main post-war movements in the rate of U.S. joblessness. The equations do well in forecasting unemployment many years out-of-sample, and provide evidence that the oil-price spike associated with Iraqs invasion of Kuwait appears to be a component of the mystery recession which followed. 1. Introduction Unemployment is a central object of study in macroeconomics, yet it remains poorly understood. Wide disagreement persists about such basic questions as whether unemployment is mostly voluntary or involuntary, and whether business cycles mostly reflect movements in equilibrium unemployment or fluctuations around a relatively stable equilibrium. In this paper, we propose a model that generates substantial, business-cycle frequency mov

Some current utility models presume that people are concerned with their relative standing in a reference group. If this is true, do certain types care more about this than others? Using simple binary decisions and self-reported happiness, we investigate both the prevalence of "difference aversion" and whether happiness levels influence the taste for social comparisons. Our decision tasks distinguish between a person's desire to achieving the social optimum, equality or advantageous relative standing. Most people appear to disregard relative payoffs, instead typically making choices resulting in higher social payoffs. While we do not find a strong general correlation between happiness and concern for relative payoffs, we do observe that a willingness to lower another person's payoff below one's own (competitive preferences) seems correlated with unhappiness. Keywords: Happiness, Relative Payoffs, Social Preferences, Subjective Well-being JEL Classification: A12, A13, B49, C91, D63. ...

When unemployed workers are available, why don’t firms cut wages until the excess supply is eliminated, as would happen in the ideal markets depicted by conventional economic theory? This question has been central to the great macroeconomic debates that arose from the Keynesian Revolution. Keynesian economists, from Modigliani (1944) through Fischer (1977) and the various authors represented in Mankiw and Romer (1991), have argued that wage rigidity reflects social, institutional and other forces that prevent the labor market from clearing, create involuntary unemployment and justify macroeconomic intervention. On the other side, new classical economists have argued that what appears to be wage stickiness is actually a result of market-clearing forces, operating in a complex real-world environment. 1 For example, Lucas and Rapping (1969) argued that intertemporal substitution makes short-run labor supply highly elastic, so that declines in demand result in relatively little movement in the market-clearing wage. Barro (1977) argued that efficient wage contracts stipulate sticky wages so as to provide income insurance to risk-averse workers, but that this does not stop a contract from also specifying an efficient level of employment, as if markets were clearing. Rogerson (1988) even derived such a contract-based explanation from an Arrow-Debreu general equilibrium model with indivisible labor. Many alternative explanations have been proposed for apparent wage stickiness, involving bargaining, monopoly unions, market misperceptions, hold-up problems, multiple equilibria, dual labor markets, adverse selection, the stigma of unemployment, shirking, intersectoral reallocation, search and recruiting costs, fairness, insiders versus outsiders, menu costs, and so on. Yet none of these explanations has found enough empirical support for anyone

How do human beings make wage comparisons? This paper provides empirical support for an approach suggested by the psychologist Allen Parducci. The paper combines an experimental study with an analysis of data on 16,000 British employees. Satisfaction levels are shown to depend not simply upon relative pay but upon an individual’s ordinal rank within a comparison group (for example, whether the individual is 4th or 34th in the wage hierarchy of the company). Moreover, consistent with Parducci’s theory, quits in a workplace are higher the greater is the positive skewness of the pay distribution. This research was supported by grants 88/S15050 from BBSRC (UK) and grants R000239002 and R000239351 from ESRC (UK). Any opinions in this article are those of the individual authors only; they do not necessarily reflect the views or policies of Watson Wyatt. For helpful suggestions, we are