Choice of colleagues as reference group for wage comparison: does group composition matter?

Social comparison is an important issue in the context of subjective well-being. Subjective well-being is not only affected by individual salary but also by the salary of a reference group. However, in the literature the question of the choice of reference group is rarely addressed. In most studies, the reference group is considered an exogenous variable which is imposed by the analyst and is the same for all individuals. This paper assesses, in the framework of wage comparison, variables that influence the choice of colleagues as the reference group. In particular, we focus on the link between the choice of this group and the demographic characteristics of the potential reference group itself. To our knowledge, this question has not been studied in the literature. Utilizing a recent survey on working conditions and quality of working life in Luxembourg, we estimate a model of the choice of colleagues as the reference group rather than other alternatives. Due to the diversity of its labor force, Luxembourg provides an interesting context for studying the link between reference group and the demographic makeup of the firm. Our results show that the demographic characteristics of the potential reference group matter in the choice of reference group.