Pay Growth, Fairness, and Job Satisfaction: Implications for Nominal and Real Wage Rigidity

Abstract

AbstractTheories of wage rigidity often rely on a positive relationship between pay changes and utility, arising from concern for fairness or gift exchange. Supportive evidence has emerged from laboratory experiments, but the link has not yet been established with field data. This paper contributes a first step, using representative British data. Workers care about the level and the growth of earnings. Below‐median wage increases lead to an insult effect, except when similar workers have real wage reductions or when firm production is falling. Nominal pay cuts appear to be insulting even when the firm is doing badly.