Does Wage Rank Affect Employees’ Wellbeing?

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 grateful to Dick Easterlin, Richard Freeman, Carol Graham, Larry Katz, George Lowenstein, Erzo Luttmer, Karl Schag, and Frank Vella. We also thank participants in presentations at a 2003 Brookings Institution conference; Gary Becker’s evening seminar at the University of Chicago; the 2005 American Economic Association Meeting in Washington DC; and research seminars at the universities of Edinburgh, Essex, the European University Institute (Florence), Harvard, Oxford, Paris, Warwick, and York.