The Social Dynamics of Economic Comparisons: A Longitudinal Study on the Effects of Relative Wages on Subjective Well-Being Using Linked Survey and Register Data

Abstract The implications of wage distributions within firms have garnered increasing attention in recent research, particularly concerning their impact on employees’ subjective well-being. The existing literature, however, presents mixed findings, which may be attributed to the interplay of two opposing forces: social status comparison and the tunnel effect. In this paper, we aim to address this issue by examining the mechanisms underlying these forces. To accomplish this, we leverage a combination of panel study data and comprehensive register data on wage distributions within firms. Our primary hypotheses posit that higher average establishment wages contribute to improved subjective well-being (tunnel effect), whereas decreases in individual ranks lead to reduced well-being (social status comparison). Using fixed effects regressions, we explore these effects and their implications on both job satisfaction and life satisfaction. Our results highlight the complex dynamics surrounding wage distributions, indicating that they serve as indicators of future success and markers of social status within the specific organizational context. These findings shed light on the intricate relationship between wage distributions and subjective well-being, providing valuable insights for understanding the implications of wage disparities within firms.