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The Relative Utility Hypothesis With and Without Self-reported Reference Wages

Author

Listed:
  • Adrian de la Garza
  • Giovanni Mastrobuoni
  • Atsushi Sannabe
  • Katsunori Yamada
Abstract
This article uses survey data of 90,000 union employees working in 62 publicly-traded companies in Japan between 1990 and 2004 to study the effect of both own and self-reported reference wages on workers' subjective well-being levels. The availability of self-reported reference wages generates very robust findings that do not depend on questionable identifying assumptions. These findings confirm that higher estimates by workers of their peers' earnings are associated with lower levels of life and job satisfaction. These comparison effects are statistically and economically strong but are smaller in absolute value than the impact of workers' own wages on their own utility. We compare our results with standard tests of the relative utility hypothesis in the literature that recur to alternative proxies for comparison wages, including: (i) Mincer-predicted wages; (ii) cell averages defined over different groups within our dataset; (iii) cell wage averages estimated from an external data source; and (iv) colleagues' average wages. In spite of their potential flaws — that we discuss — these alternative empirical constructs employed in the literature do not introduce a simple classical measurement error problem and the bias attributed to this measurement error issue can go in both directions. We propose a simple IV strategy when the self-reported reference wage is not available that does not eliminate the bias but delivers a lower bound of the "true" effect. We also address the issue of endogeneity of self-reported reference wages in our subjective well-being regressions by accounting for workers' pessimistic attitudes at the workplace.

Suggested Citation

  • Adrian de la Garza & Giovanni Mastrobuoni & Atsushi Sannabe & Katsunori Yamada, 2010. "The Relative Utility Hypothesis With and Without Self-reported Reference Wages," Carlo Alberto Notebooks 159, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:159
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    Cited by:

    1. Goerke, Laszlo & Pannenberg, Markus, 2013. "Keeping up with the Joneses: Income Comparisons and Labour Supply," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80033, Verein für Socialpolitik / German Economic Association.
    2. Goerke, Laszlo & Pannenberg, Markus, 2015. "Direct evidence for income comparisons and subjective well-being across reference groups," Economics Letters, Elsevier, vol. 137(C), pages 95-101.
    3. Andrew E. Clark & Claudia Senik & Katsunori Yamada, 2022. "The Joneses in Japan: income comparisons and financial satisfaction," The Japanese Economic Review, Springer, vol. 73(2), pages 351-372, April.
    4. Yamada, Katsunori & Sato, Masayuki, 2013. "Another avenue for anatomy of income comparisons: Evidence from hypothetical choice experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 35-57.
    5. Clark, Andrew E. & Senik, Claudia & Yamada, Katsunori, 2017. "When experienced and decision utility concur: The case of income comparisons," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 70(C), pages 1-9.
    6. Laetitia Hauret & Donald R. Williams, 2019. "Relative Income and Pay Satisfaction: Further Evidence on the Role of the Reference Group," Journal of Happiness Studies, Springer, vol. 20(1), pages 307-329, January.
    7. Temesgen Kifle, 2014. "Do Comparison Wages Play a Major Role in Determining Overall Job Satisfaction? Evidence from Australia," Journal of Happiness Studies, Springer, vol. 15(3), pages 613-638, June.
    8. Gabriele Ruiu & Maria Laura Ruiu, 2019. "The Complex Relationship Between Education and Happiness: The Case of Highly Educated Individuals in Italy," Journal of Happiness Studies, Springer, vol. 20(8), pages 2631-2653, December.
    9. Sun Youn Lee & Fumio Ohtake, 2021. "How Conscious Are You of Others? Further Evidence on Relative Income and Happiness," Journal of Happiness Studies, Springer, vol. 22(8), pages 3321-3356, December.
    10. Katsunori Yamada & Masayuki Sato & Yasuhiro Nakamoto, 2009. "Measurement of Social Preference from Utility-Based Choice Experiments," ISER Discussion Paper 0759, Institute of Social and Economic Research, Osaka University.

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    More about this item

    Keywords

    Subjective well-being; relative utility; reference wages;
    All these keywords.

    JEL classification:

    • D00 - Microeconomics - - General - - - General
    • J28 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Safety; Job Satisfaction; Related Public Policy

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