Inequality at Work: The Effect of Peer Salaries on Job Satisfaction

We study the effect of disclosing information on peers' salaries on workers' job satisfaction and job search intentions. A randomly chosen subset of employees of the University of California was informed about a new website listing the pay of University employees. We find an asymmetric response to the information about peer salaries: workers with salaries below the median for their pay unit and occupation report lower pay and job satisfaction, while those earning above the median report no higher satisfaction. Likewise, below-median earners report a significant increase in the likelihood of looking for a new job, while above-median earners are unaffected. Thus, job satisfaction depends on relative pay comparisons, and this relationship is nonlinear. Economists have long been interested in the possibility that individuals care about both their absolute income and their income relative to others.1 Recent studies have documented systematic correlations between relative income and job satisfaction (e.g., Clark and Oswald 1996), happiness (e.g., Luttmer 2005 and Solnick and Hemenway 1998), health and longevity (e.g., Marmot 2004), and reward-related brain activity (e.g., Fliessbach et al. 2007).2 Despite confirmatory findings from laboratory experiments (e.g., Fehr and Schmidt 1999), the interpretation of the empirical evidence is not always straightforward. Relative pay effects pose a daunting challenge for research design, since credible identification hinges on the ability to isolate exogenous variation in the pay of the relevant peer group.