Reference Income and Pay Satisfaction: How Do People Choose Their Reference Group?

When exploring individual well-being, not only satisfaction with life as a whole is a suitable basis for analyses – also information on satisfaction with certain domains can provide valuable insight into how people are affected by the circumstances of their lives. Satisfaction with the personal income reflects not only whether people assess their pay as high enough to deal with every day’s expenses but also people’s perception of how their effort and performance is valued by others (e.g. the employer), which can be a considerable aspect of mental well-being. In this context, the comparison with other working people is always an important benchmark when evaluating the own income situation.

As is known, reference groups for income comparisons can be people of same profession, with same education or colleagues, etc. This paper provides further insight into the field of study of whether different groups of people apply different reference groups when evaluating their income and – if applicable – which aspects motivate the choice of reference group (e.g. information disparities).

Data base is the German Socio-economic Panel Study (SOEP) of 2010. Several types of reference groups are defined and the impact of their income on the personal income satisfaction of different population groups is analyzed, applying an ordered logit model.