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Abstract Empirical studies on job satisfaction have relied on two hypotheses: firstly, that wages are exogenous in a job satisfaction regression and secondly, that appropriate measures of relative wage can be inferred. In this paper we test both assumptions using two cohorts of UK university graduates. We find that controlling for endogeneity, the direct wage effect on job satisfaction doubles. Several variables relating to job match quality also impact on job satisfaction. Graduates who get good degrees report higher levels of job satisfaction, as do graduates who spend a significant amount of time in job search. Finally we show that future wage expectations and career aspirations have a significant effect on job satisfaction and provide better fit than some ad-hoc measures of relative wage. This paper was produced as part of the Centres Labour Market Programme Thanks to Kevin Denny, Jonathan Gardner, Gauthier Lanot, Pedro Martins, Andrew Oswald, Ian Walker, and participants at seminars at the University of Warwick and the London School of Economics for helpful comments and suggestions. Reamonn Lydon is a member of the Department of Economics, University of Warwick. Arnaud Chevalier is a member of the Centre for the Economics of Education, CEP, London School of Economics and also at the Institute for the Study of Social Change, University College Dublin. Corresponding author: r.p.lydon@warwick.ac.uk ; tel: +44 2476 528240 Published by Centre for Economic Performance London School of Economics and Political Science Houghton Street London WC2A 2AE Reamonn Lydon and Arnaud Chevalier, submitted January 2002 ISBN 0 7530 1552 8 Individual copy price: £5 Estimates of the Effect of Wages on Job Satisfaction Reamonn Lydon and Arnaud Chevalier May 2002 1. 1 2. Data and Job Satisfaction Measures 3 3. Models and the Endogeneity of Wages 5 3.1 Basic Models 6 3.2 Extension to the basic model (past and future expectations) 13 4. 17 18 19 Appendix Tables 25 28 The Centre for Economic Performance is financed by the Economic and Social Research Council !"# $ $ % & ' '($ ) &* '+ ( ,-..# & '+/ 0 ( 1-..# 20 3 ( 4 1-..#4 & ) $ & 5 3 6 4 4 )7 4 4 6 0 4 !!-..89 $ 4 :89 $4 !8;* 5 2$4 # 6 $ ) ) 4 % ' % = 4 4 6 ) , )$ % , $ = % 4 4 & 4 , è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igure 1 Quit behaviour, wages and job satisfaction 0.070.170.370.470.570.6700.661.331.992.663.333.994.665.335.996.667.337.998.66Log of gross pay per weekProbability of quitting your job Completely satisfied with the j ob: The sample is of 9000 workers from the first, second, seventh and eighth waves of the British Household Panel Survey. 15% are quitters, standard errors corrected for clustering. The estimates are not corrected for possible simultaneity bias arising out of the joint 19Table 1 Wages: marginal effects on probability of being satisfied with the job (uncorrected for endogeneity) Neutral Increase wages by £2500 -0.63% -1.81% +2.44% Increase wages by £5000 -0.91% -2.61% +3.50% Increase wages by £10000 -1.31% -4.02% +5.32% Dissatisfied = (1,2), neutral = (3,4), satisfied = (4,5) Table 2a Wages: marginal effects on probability of being satisfied with the job (corrected for endogeneity) Neutral Increase wages by £2500 -1.71% -4.76% +6.47% Increase wages by £5000 -2.32% -6.89% +9.21% Increase wages by £10000 -3.22% -10.69% +13.90% See notes for Table 1. Table 2a Wage effects controlling for occupation Wage instrumented No No Yes Yes Occupation controls No Yes (2-Yes (2-digIncrease wages by £10000 Z-statistics See notes for Table 1. 20Table 3 Job characteristics: marginal effects Neutral -1.77% -6.26% -8.03% Double months unemployed +0.29% +0.80% -1.09% hour +0.92% +2.38% -3.30% Firm size: 99 +2.85% +5.29% -8.13% Firm size: 499 +4.16% +7.01% -11.16% % t;o 00;Firm size: +3.58% +6.29% -9.88% nths for 1985 (1990) graduates. Table 4 Personal characteristics: marginal effects (corrected for endogeneity) Neutral Gender effect: female to male +1.18% +3.05% -4.22% Increase age by ten years +0.84% +1.84% -2.68% Add one extra child -0.70% -1.75% +2.45% Subjects: medicine to agriculture -3.13% -13.08% +16.22% Subjects: medicine to physics -0.54% -1.60% +2.14% 21Table 5 Basic models of job satisfaction (1) Ordered Probit (2) Ordered probit (AGLS) Coef. Z Coef. Z Log annual pay Log weekly hours --3.160 -0.376-2.420 Professional job -0.025 -0.470 Clerical job --3.600 -0.225-1.670 Sales job Public sector job --2.900 -0.056 -1.070 Managerial job 25-99 people the workplace --3.430 -0.205-3.810 499 people the workplace --4.380 -0.282-4.630 500 or more the workplace --3.750 -0.249-3.830 Months Employed --0.450 -0.004 -0.980 Months Employed^2 Months unemployed --4.430 -0.013-1.970 Age --1.680 -0.007-2.160 Male --2.820 -0.157-3.140 Number of children Qualification Characteristics Undergraduate degree --0.170 -0.034 -0.540 Postgraduate degree Old' university qualification -0.058 -1.140 First class honours Second class honours -0.012 -0.280 Grammar School 0.010 -0.032 -0.720 Fee Paying school Lived in a council house at aged 14 --0.650 -0.004 -0.060 Smith-Blundell test for weak exogeneity Pseudo R^2 N 4565 4565 Log likelihood -6776.0 -6776.6 : Dummies, for region and subject studied are also included in the estimation. Z-statistics are in italics. Significant at 10% level. 22Table 6 Reduced form wage equation Dependent variable: ln(annual Coefficient t-statistic Spouses characteristics Traditional University First class honour Upper second honour Undergraduate degree Postgraduate degree Biology -0.164 -6.340 Agriculture -0.327 -7.840 Physics -0.115 -4.760 Maths -0.019 -0.700 Engineers -0.117 -4.830 Architecture -0.218 -6.510 Social Science -0.075 -3.330 Business and Administrative Studies -0.082 -3.430 Languages -0.169 -6.480 Education -0.106 -4.190 Humanities -0.216 -8.410 Male Number of children (Months employed)^2 -0.001 -0.970 Months unemployed -0.014 -9.560 (Months unemployed)^2 0.0001 6.850 Professional Clerical Job -0.323 -9.670 Sales Job -0.051 -1.510 Public Sector -0.101 -8.350 Managerial job 25-99 people the workplace 500 or more the workplace Went to grammar school Went to fee paying school R-squared Observations 23Dependent variable: ln(spouses salary) Coefficient t-statistic Spouse works part-time -0.299 -6.410 First class degree -0.005 -0.140 Ln(1996 pay) Mobile dummy Clerical job Public sector job -0.028 -1.300 25-99 People in the workplace -0.024 -0.890 499 People in 500 People or more in the workplace Months unemployed -0.004 -1.850 Age Number of children Agriculture degree -0.073 -0.930 R-squared Observations the one he/she lived in when he/she was first employed after gaining his/her diploma or degree. Except for those variables grouped under all of the above variables are significant in the job 24Table 8 Extended models: posterior choice Variable Coefficient Z-ent Z-stat Coefficient Z-0.80 3.44 0.88 3.31 0.68 2.43 Expected pay (1996) -0.22 -0.96 -0.24 -2.47 -0.17 -1.76 One Year Ago Better off than now Worse off than now 0.21 2.98 About the same 0.16 2.69 One year from now Better off than now Worse off than now -0.48 -6.76 About the same -0.17 -4.24 Dont know -0.62 -6.23 Five years from now Better off than now Worse off than now -0.41 -5.95 About the same -0.15 -2.91 Dont know -0.27 -5.13 Smith-Blundell Exogeneity test 0.33 6.62 0.28 5.66 N 4565 4565 4565 Log likelihood -6776.5 -6764.1 -6636.7 LR-test test ] distribution, with degrees of freedom Test (2) against basic model: Chi2[9]=24.93b Test (3) against basic model: Chi2[17]=279.8b Test (3) against (2): : (a). Specification (2) also graduates were part-time, undertaking further study while working, self-employed or employed, working from home, etc. The inclusion of these controls accounts for the 9 degrees of freedom statistic in the final row of Table 4. The overall results, including the results from the LR test are robust to inclusion or exclusion of these controls. (b). The results from the Likelihood ratio test imply that we 25 Table A1 respondents financial situation in the past (1995) and future (1997 and 2001) Full Sample Better off Worse off About same Dont know T=1995 9 53 38 --- T=1997 47 7 43 3 T=2001 67 6 14 13 Female, 1985 qualification T=1995 9 46 45 --- T=1997 36 9 51 4 T=2001 56 8 19 17 Female, 1990 qualification T=1995 10 53 37 --- T=1997 46 8 44 3 T=2001 63 8 14 14 Male, 1985 qualification T=1995 10 51 39 --- T=1997 48 6 42 3 T=2001 68 6 15 11 Male, 1990 qualification T=1995 8 59 33 --- T=1997 55 6 38 2 T=2001 78 4 8 9 The numbers in the table are interpreted as follows: 9% of female respondents from the 1985 cohort thought they were better off in the previous year than now (1996), 36% of the same group 26IV Sample (n = 4565) Full Sample (n = 9415) Gender (year of graduation) Female (85) Male (85) Female (90) (90) Female (85) Male (85) Female (90) Male (90) Diplomats 0.05 0.06 0.12 0.15 0.11 0.05 0.06 0.12 0.15 0.11 Undergraduate Degree 0.80 0.77 0.71 0.68 0.73 0.78 0.79 0.73 0.71 0.74 Postgraduate Degree 0.16 0.16 0.17 0.16 0.16 0.16 0.15 0.16 0.14 0.15 Job Satisfaction 4.27 4.30 4.23 4.17 4.24 4.18 4.23 4.17 4.14 4.17 (1.15) (1.10) (1.19) (1.17) (1.16) (1.20) (1.15) (1.22) (1.16) (1.18) Job Satisfaction=1 0.02 0.02 0.03 0.03 0.02 0.03 0.02 0.03 0.03 0.03 Job Satisfaction=2 0.06 0.06 0.06 0.06 0.06 0.07 0.06 0.07 0.07 0.07 Job Satisfaction=3 0.15 0.13 0.16 0.14 0.15 0.15 0.13 0.16 0.15 0.15 Job Satisfaction=4 0.30 0.31 0.29 0.32 0.30 0.30 0.32 0.30 0.32 0.31 Job Satisfaction=5 0.35 0.38 0.34 0.36 0.36 0.34 0.36 0.32 0.35 0.34 Job Satisfaction=6 0.12 0.10 0.120.09 0.11 0.11 0.10 0.12 0.09 0.10 Log annual pay 1996 9.95 10.28 9.81 10.03 10.00 9.96 10.27 9.82 9.97 9.98 0.56 0.44 0.44 0.4 0.48 0.53 0.46 0.42 0.43 0.48 Log annual pay 1991 9.84 9.97 9.5 9.63 9.71 9.81 9.97 9.47 9.58 9.68 0.39 0.41 0.42 0.38 0.44 0.41 0.42 0.44 0.41 0.46 Weekly work hours 37.66 45.53 40.59 45.24 42.38 39.29 45.33 41.53 44.66 42.96 11.38 8.36 9.89 8.69 10.05 10.83 8.42 9.35 8.84 9.51 119.9 123.36 64.22 65.34 87.11 120.09 122.78 62.90 63.45 84.07 18.01 15.55 11.61 12.11 31.17 17.49 15.92 13.01 13.33 31.56 Months unemployed* 2.32 2.45 1.81 2.08 2.11 2.71 3.14 2.35 2.95 2.76 7.57 6.21 4.2 5.56 5.75 7.36 7.69 5.41 6.57 6.61 34.35 34.83 31.17 31.08 32.49 34.53 34.48 30.68 30.21 31.90 4.69 4.97 6.49 5.86 5.96 4.87 4.53 6.06 4.99 5.61 Professional 0.63 0.56 0.61 0.57 0.59 0.61 0.56 0.61 0.55 0.58 0.03 0.01 0.05 0.02 0.03 0.04 0.01 0.05 0.03 0.03 0.02 0.03 0.02 0.03 0.03 0.02 0.03 0.03 0.03 0.03 Public sector 0.53 0.33 0.58 0.33 0.45 0.53 0.31 0.56 0.32 0.43 Managerial job 0.19 0.26 0.15 0.19 0.19 0.20 0.23 0.15 0.17 0.18 Firm size0.20 0.17 0.2 0.14 0.18 0.20 0.16 0.20 0.15 0.17 Table A2 Summary statistics for IV sample and full sample 27 IV Sample Full Sample Female (85) Male (85) Female (90) Male (90) All Female (85) Male (85) Female (90) Male (90) Firm size 25-99 0.22 0.19 0.24 0.19 0.21 0.23 0.18 0.25 0.19 0.21 499 0.15 0.22 0.19 0.21 0.19 0.17 0.22 0.19 0.23 0.20 Firm size499 0.42 0.42 0.37 0.46 0.42 0.40 0.44 0.36 0.44 0.41 Permanent job 0.89 0.92 0.88 0.90 0.90 0.88 0.90 0.88 0.87 0.88 Old University Degree 0.75 0.81 0.45 0.41 0.57 0.76 0.82 0.45 0.45 0.58 First class degree 0.05 0.05 0.06 0.06 0.05 0.04 0.06 0.06 0.07 0.06 Second class degree 0.30 0.29 0.29 0.26 0.28 0.29 0.28 0.30 0.26 0.28 Married 0.84 0.85 0.66 0.70 0.74 0.57 Partner 0.16 0.15 0.34 0.30 0.26 0.15 0.12 0.24 0.19 0.19 Number of kids 0.81 0.93 0.33 0.44 0.57 0.58 0.86 0.21 0.34 0.44 Mobile Dummy Variable 0.44 0.46 0.35 0.34 0.39 0.44 0.48 0.36 0.38 0.40 0.12 0.07 0.11 0.06 0.09 0.12 0.06 0.11 0.05 0.08 Biology 0.09 0.07 0.08 0.04 0.07 0.10 0.06 0.08 0.05 0.07 Agriculture 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 Physics 0.08 0.14 0.07 0.12 0.1 0.08 0.15 0.07 0.12 0.10 Maths 0.07 0.08 0.05 0.08 0.07 0.06 0.09 0.04 0.09 0.07 0.03 0.2 0.03 0.23 0.12 0.02 0.21 0.03 0.23 0.13 Architecture 0.01 0.03 0.02 0.06 0.03 0.01 0.03 0.02 0.06 0.03 Social science 0.15 0.13 0.15 0.12 0.14 0.15 0.13 0.15 0.12 0.14 Business Administration 0.08 0.09 0.15 0.15 0.12 0.08 0.09 0.15 0.13 0.12 Languages 0.17 0.03 0.09 0.01 0.07 0.17 0.04 0.09 0.02 0.07 Humanities 0.09 0.07 0.09 0.06 0.08 0.10 0.07 0.11 0.07 0.09 Education 0.09 0.06 0.15 0.06 0.09 0.09 0.05 0.13 0.04 0.08 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