Originally published here.

The literature on gender wage inequality is well established and clear in concluding that a substantial and persistent earnings gap exists between male and female employees. The surveys by Altonji and Blank (1999) and Weichselbaumer and Winter-Ebman (2005) are complemented by recent evidence for Britain for a number of data sources in Anderson et al., (2004), Connolly and Gregory (2008), and Mumford and Smith (2008). For example, linked employee-employer data for Britain from the Workplace Employee Relations Survey 2004 (WERS04) shows an average raw earnings gap between men and women of 18.7 log percentage points; on average, men earn £1.79 more an hour than do women (Table 1). Despite this sizable earnings gap, women typically report higher levels of job satisfaction than do men. In this paper we ask whether differences in the response of measured job satisfaction to individual and relative earnings might help explain the persistence in the male-female earnings gap.

There has been an enormous surge in the number of studies of satisfaction and/or happiness in the recent economics’ literature (recent surveys are provided by Ferrer-i- Carbonell, 2005; van Praag, 2007; Dolan et al., 2008). There are also many criticisms that can be made of these studies, not least the fundamental assumption that respondents supplying the same survey response do actually have the same utility level (van Praag, 2007: page 8). There is evidence, however, that this is a legitimate assumption and that such subjective measures, if collected and analysed in a credible manner, may have a valid role to play in the measurement of social welfare (Kahneman and Krueger, 2006: page3).

Employees appear to have a good understanding of their wage relative to their fellow employees, male or female, (Heywood, 1993). This is not to say that they care equally about the gap between their own wage and the salaries of all other employees. It has long been recognised that workers compare their wages to those other workers who they consider to be similar to themselves by custom (Mill, 1867: page 236; Phelps Brown, 1979: page 134.). Wood (1978: page 23) argues that comparative or reference sets of employees or jobs are those where the relative pay is easily ascertainable and that this is typically the case for workers in the same establishment.

The response of an employee to their relative wage is perhaps not obvious a priori. Workers may care about the absolute size of the gap between their own wage and the comparison group (Phelps Brown, 1979: page 141). Or they may distinguish between an increase in their own wage and a reduction in the average wage in the comparison group (Easterlin, 1995: pages 36-37).

Employees may also react asymmetrically to their being paid relatively higher or lower than their comparison group (Duesenberry, 1949). Furthermore, the behavioural responses are not clearly established in the literature. For example, Zisso and Oswald (2001) argue that an employee may be unsatisfied if their wage is lower than other relative wages leading them to feel envious or unfairly treated. Alternatively, working in a workplace where their wage is low relative to the other wages may encourage the employee to believe that they too will receive higher wages in the future (Clark et al,2008).

The main contribution we make to this research area is to explore the gender differences in the relationship between job satisfaction and relative wages amongst co-workers at the establishment level using linked employee and workplace data for Britain (WERS04). In particular, we address the possibility that that choice of relevant comparison group is affected by gender. We also explore the relationships between reported job satisfaction and own wage, relative wage and average comparison group wage and allow for asymmetries in these responses across genders.

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