Does knowing what your peers make matter to how happy you are? Certainly, the utility functions that I sketch in Econ 300 say no. As Ray Fisman puts it in a recent piece at Slate, “Why do we care what those around us make? It doesn’t affect the real estate or furniture or sushi dinners we can afford.”
On the other hand, of course it matters. And Fisman continues:
[I]n recent years, economics has become both more social and behavioral, borrowing evidence and ideas from elsewhere in the social sciences. Economists now acknowledge that we constantly judge our own accomplishments in comparison to others, and salaries serve as one ready benchmark. People (and perhaps monkeys, too) are also averse to inequality—unequal pay for equal work just isn’t fair (especially if you’re the one who drew the short straw).
Fisman talks about an ingenious study by group of economists, including David Card and MacArthur genius grant winner Emmanuel Saez, that investigated how differences in pay affect variables like job satisfaction. If you are interested in how economists think about these things and how they evaluate them empirically, this paper is worth checking out. The abstract is below the fold: Continue reading Interdependent Utility Functions