On the Economic Architecture of the Workplace: Repercussions of Social Comparisons among Heterogeneous Workers

Abstract

We analyze the impact on a firm’s profits and optimal wage rates, and on the distribution of workers’ earnings, when workers compare their earnings with those of coworkers. We consider a low-productivity worker who receives lower wage earnings than a high-productivity worker. When the low-productivity worker derives (dis)utility not only from his own effort but also from comparing his earnings with those of the high-productivity worker, his response to the sensing of relative deprivation is to increase the optimal level of effort. Consequently, the firm’s profits are higher, its wage rates remain unchanged, and the distribution of earnings is compressed.

A bitter choice turned sweet: How acknowledging individuals’ concern at having a low relative income serves to align utilitarianism and egalitarianism

“…realizations differ from what they would have been if comparisons with others did not matter (see, for example, Stark and Taylor, 1991;Zizzo and Oswald, 2001;Luttmer, 2005;Blanchflower and Oswald, 2008;Stark and Hyll, 2011).…”

Reconciling the Rawlsian and the utilitarian approaches to the maximization of social welfare

“…Probably the closest to our work is a paper by Boskin and Sheshinski (1978) who investigate optimal tax rates for utilitarian and maximin criteria of social constitute their "comparison group"). Examples of studies that recognize such discontent include Stark and Taylor (1991), Zizzo and Oswald (2001), Luttmer (2005), Fliessbach et al (2007), Blanchflower and Oswald (2008), Takahashi et al (2009), Stark and Hyll (2011), Stark et al (2012), and Card et al (2012. Stark (2013) presents corroborative evidence from physiology.…”

Integration, social distress, and policy formation

“…I measure the distress of an individual by the extra income units earned by others in the population, I sum up these excesses, and I normalize by the size of the population. This procedure tracks the seminal work of Runciman (1966) and its articulation by Yitzhaki (1979) and Hey and Lambert (1980); a detailed description of the measure and of its derivation is in Stark and Hyll (2011). In my definition of relative deprivation, I resort to income-based comparisons, namely, an individual feels relatively deprived when others in his comparison group earn more than he does.…”

“…() ARD x is my index of the level of "distress" of population P. (For several usages of this measure in recent related work see Stark, 2010;Stark and Fan, 2011;Stark and Hyll, 2011;Fan and Stark, 2011;Stark et al, forthcoming;and Stark et al, 2012. ) In sections 3-5, the individuals' incomes are not allowed to decline.…”