Wage increases only have a temporary effect on job satisfaction

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After a wage increase, people tend to be more satisfied with their jobs—and even more so when what they have gained exceeds the wage increases of their colleagues. Yet, this effect on job satisfaction is not persistent. Two economics professors reported these findings in a study recently published in the Journal of Economic Behavior & Organization.

What the researchers say: The researchers carried out an in-depth investigation of the relationship between job satisfaction and wage changes. This topic is of interest to employers since job satisfaction is a predictor of employees’ willingness to invest energy for the benefit of the organization they work for. Satisfied employees are also less likely to leave.

In this study, almost 33,500 observations from the representative German Socio-Economic Panel were analyzed; with the majority of individuals indicating a job satisfaction of 7 on a 0 to 10 scale.

In line with expectations, the study found that job satisfaction was positively influenced by wage increases. Social comparisons also played a part in this—job satisfaction increased further when an individual’s wage rose by more than his/her peers’ wages over the same period (showing that people only really disapprove of inequality when they see themselves as less equal than others). Interestingly the researchers found that employees were already more satisfied with their jobs one year before the effective wage increase, i.e., they appeared to be positively influenced by the mere expectation of such an event.

However, the rise in job satisfaction after a wage increase is only temporary, as the effect fades out within four years. According to behavioral-economic theory, this can be explained by the fact that people do not evaluate their income in absolute terms, but rather in relation to their previous income. Furthermore, people adapt to their new wage level over time, so a higher salary becomes the new reference point for future comparisons.

The same mechanisms appeared to be at work in the opposite direction: Negative reactions to wage cuts were also temporary, a finding that the researchers again explain with reference point adaptations and social comparisons—since most wage cuts are associated with company- or industry-specific shocks, they typically also affect the respective individuals’ colleagues.

The researchers conclude that wage increases can be a tool to motivate employees, yet only under carefully designed conditions. For instance, when they are implemented regularly and are accompanied by promotions. The researchers’ results thus confirm the latest research findings from experimental economics, which indicate that wage increases in small, but regular increments—rather than less frequent but higher increases that add up to an equivalent amount—are the most effective way to motivate employees in the long run.

So what? Wages, and more especially, bonuses are about three things:

  • The actual money and the safety it can buy—this is more acute for low-income earners
  • The status that extra money can bring—especially if one awarded more than one’s fellows
  • The sense of being valued by one’s employer.

The researchers confirm something that behavioral scientists have long suspected: the effect of monetary reward is short-lived—the brain regularizes the new amount and it becomes the new platform. Anything less than an equivalent rise next time will be seen as a betrayal leading to a feeling of not being valued. This can lead to even highly-paid individuals leaving the organization.