Reference Wage Research Articles

Job Satisfaction and Reference Wages: Evidence for a Developing Country

Using Chilean data we present evidence about the relationship between job satisfaction, own wage, and reference group wage. We conducted a semi-nonparametric estimation of extended ordered probit models in order to identify the determinants of job satisfaction. Our main result indicates that a 10 % increase in the reference group wage would need to be compensated for by a 24.9 % increase in the own wage to give the same level of job satisfaction. This result shows the enormous importance of the reference group wage for job satisfaction.

The Most Beautiful Variations on Fair Wages and the Phillips Curve

This paper explores the connection between inflation and unemployment in two different models with fair wages in both the short and the long runs. Under customary assumptions regarding the sign of the parameters of the effort function, more inflation lowers the unemployment rate, albeit to a declining extent. This is because firms respond to inflation—which spurs effort by decreasing the reference wage—by increasing employment, thus maintaining the effort level constant as implied by the Solow condition. A stronger short-run effect of inflation on unemployment is produced under varying as opposed to fixed capital, given that in the former case the boom produced by a monetary expansion is reinforced by an increase in investment. Therefore, I provide a new theoretical foundation for recent empirical contributions that find negative long- and short-run effects of inflation on unemployment.

Efficiency Wages, Unemployment Benefits and Union—Firm Wage Bargaining: The Issue of the Choice of the Outside Option

This paper points out that there may be a logical consistency issue in choosing the reference wage in efficiency wage models. We have shown that defining the outside option in the efficiency wage logic as the market-clearing wage solves this difficulty, and is justifiable in terms of the assumed behaviour of workers and employers. The model that we examine confirms earlier findings of reinforcing effects between union-firm bargaining and efficiency wages. However, if union preferences vary between wages and employment, Summers’ reinforcing effect is no longer present for each value of the parameter describing these preferences. Above a certain threshold value of union preferences for employment, the two mechanisms do not reinforce each other anymore.

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

This article makes three main contributions to the economics of happiness literature. First, using a novel data set of about 90,000 Japanese workers surveyed in annual cross-sections between 1990 and 2004, it demonstrates that individuals experience strong disutility when they perceive that their coworkers earn relatively higher wages. In contrast with other tests of the relative utility hypothesis in the literature, our estimation relies on workers' self-reported beliefs of their peers' wages, which we argue are more closely aligned to the true reference-group benchmark than the assumed comparison income measures employed in other studies. Second, the article shows important heterogeneous effects of both absolute and relative income on happiness. In particular, workers who are better able to accurately predict their peers' wages seem to experience both greater utility of higher own income and greater disutility of higher relative income. Third, we assess the validity of different methodologies that the literature has employed to construct comparison income measures and find significant discrepancies, particularly when reference income is derived from Mincer equations -- a common approach in other studies. We demonstrate that such discrepancies stem from the difficulty in finding valid exclusion restrictions that help identify the relative income effect on happiness. In the absence of self-reported reference wages, we propose a simple IV strategy that does not eliminate the lack of consistency but delivers a lower bound of the true effect.

How to Integrate Disability Benefits into an Individual Account System: The Chilean Model

Chile offers an innovative approach to disability insurance within a multi-pillar social security system. The individual's retirement savings account is used as part of his disability insurance, but if he becomes disabled the account is topped up enough to finance a defined benefit annuity that pays 70% of the reference wage. This is accomplished primarily through the private insurance market, but with government providing regulations and back-up guarantees. The private pension funds and insurance companies that participate in the assessment process have a pecuniary interest in keeping costs low, unlike most public systems that are run by agencies without a personal incentive to contain costs. The individual accounts, used for old age retirement savings, help to finance the disability and survivors' insurance as a joint product. This further keeps costs down and makes the system less sensitive to demographic shocks than a public pay-as-you-go system would be. However, pre-funding a defined benefit makes system costs much more sensitive to interest rate shifts. The defined benefit reduces risk to the worker but non-differentiated pricing creates cross-subsidies and, in a competitive market, incentives for creaming. Some of the cost reductions to the private insurance may imply a larger future public obligation, due to the minimum pension guarantee. This study examines the potential successes and pitfalls of this mixed public-private funded system of disability insurance and evaluates whether it provides a useful model for the US and other countries.

Social Security in Portugal: An Update of Long-Term Projections

At the request of the Laeken European Council, Portugal has prepared a National Strategy Report on its pension system, in view of objectives like adequacy, financial sustainability, and modernisation. This paper documents the official longterm projections of social security revenues and expenditures therein, using PROST, an actuarial model developed by the World Bank. Taking on board the pension reform effective Jan-1-2002 (Law 17/2000), simulation results suggest that, in light of the expected ageing of the population from 2000 to 2075, overall social security expenditure as a percentage of GDP is projected to grow by 3.2 pp, from 12.9 to 16.1%. Public pensions paid to former private-sector workers increase by 1.7 pp, while those paid to former civil servants rise by 1.4 pp, a larger relative increase given the latter's reduced size. As a result, the reserve fund is expected to go dry in 2029, three years earlier than if no pension reform had taken place. The 2002 pension reform entails changes to the benefit formula with offsetting financial effects: the reference wage is lowered by eventually being calculated using the whole contribution history, and the accrual rate is, in effect, increased.

How Monetary Policy can have Permanent Real Effects with Only Temporary Nominal Rigidity

A macroeconomic model is developed in which the psychological concept of loss aversion is incorporated into workers’ preferences. The impact of monetary policy in the presence of loss aversion depends on the specification of the reference wage. The plausible specification that a worker’s reference wage is the real wage she was paid in the previous period is considered in detail. Specifying the reference wage in this way, we show that an unanticipated change in monetary policy has a permanent, real effect when short term labour contracts are written in nominal wages.

On measurability and comparability: Comment on Pauwels's “the implicit welfare weights used when maximizing aggregate surplus”

The note demonstrates that the unweighted sum of the Hicksian equivalent variations is not a reasonable welfare indicator if consumers have different wages. It recommends the unweighted sum of the individual money metrics, all evaluated at thesame reference pricesand reference wage. For this measure the comparability and necessary measurability of utility functions and welfare changes can be guaranteed. In contrast to Pauwels's measure the indicator proposed possesses the properties one expects.

The Effects of College Education on the Male-Female Wage Differential

Researchers disagree on the reasons for the observed wage differential between males and females in the United States. While some researchers attribute much of the wage differential to differences in endowments of productivity characteristics between the sexes, others attribute it to discrimination in the labor market. Most researchers who believe that differences in endowments of productivity characteristics explain a large part of the wage gap between the sexes do not completely discount the existence of discrimination in the labor market. Even though there is a general agreement that discrimination accounts for part of the male-female wage differential, the proportion of wage differential found to be attributable to discrimination in research work depends upon the method of decomposing the wage differential, and whether the researcher controls for occupational and industrial differences. Most estimates of the male-female wage differential have used the decomposition analysis popularized by Oaxaca [11] and Blinder [2]. This approach to decomposing the male-female wage differential assumes that in the absence of discrimination, the equilibrium wage equals either the male wage rate or the female wage rate depending on whether the male or female wage structure is used as the basis for decomposition of the wage differential. Unless this is true, the discrimination component of Oaxaca's approach to the decomposition of the wage differential is not consistent with Becker's [1] competitive market discrimination coefficient for labor of different productivities, defined as the difference between the observed wage ratio and the wage ratio that would prevail in the absence of discrimination. If females are paid less than the value of their marginal product and males are paid more than the value of their marginal product as a result of discrimination, elimination of discrimination will result in an equilibrium wage that is likely to be less than the male wage and greater than the female wage. Any decomposition analysis that uses either the female wage or the male wage as the reference wage will over- or underestimate the effects of discrimination in explaining the male-female wage differential. This has led Butler [3] to argue that it is impossible to