Preference Change and Increasing Wage Inequality

Preference Change and IncreasingWage Inequality

Sara Connolly — Shaun Hargreaves Heap

Abstract. This paper argues that preference change could explain, in part, thegrowth of within-group wage inequality in the USA and the UK in the 1980s. Theabsence of such preference change in continental European countries might alsohelp explain why their wage inequality did not rise in the same way. The argumentrelies on evidence from the World Values Surveys and uses an efficiency wagemodel of within-group wage inequality where there are differences in the degree ofdiscretion at work across firms and workers value not just the wage but also thedegree of discretion on the job.

1. Introduction

A significant part of the dramatic change in wage inequality inthe 1980s in the UK and the USA was attributable to an increase ofwithin-group wage inequality (e.g. Bound and Johnson, 1992;Slaughter, 1998). This paper considers how preference changes (ora change in norms) in these countries might have contributed to thisaspect of the rise in inequality; and, in doing this, it may also helpexplain why the change in wage inequality was less dramatic in thecontinental European economies in this period than the UK and theUSA.

We begin in Section 2 with some evidence on preference changesin the UK, the USA, and continental Europe and then set out anamended efficiency wage model in Section 3 where preferencechange affects within-group wage inequality. The efficiency wage

Sara Connolly — Shaun Hargreaves Heap (corresponding author), Professor ofEconomics, School of Economics, University of East Anglia, Norwich NR4 7TJ,UK. E-mail: [email protected].

We wish to thank an anonymous referee for helpful comments.

LABOUR 21 (1) 43–55 (2007) JEL D31, J28, J31© 2007 The AuthorsJournal compilation © 2007 CEIS, Fondazione Giacomo Brodolini and Blackwell Publishing Ltd., 9600Garsington Rd., Oxford OX4 2DQ, UK and Main St., Malden, MA 02148, USA.

mailto:[email protected]

model is a natural starting point because it is often argued thatthe observed within-group wage inequality in the USA cannotbe explained by a competitive model of the labour market (e.g.Krueger and Summers, 1988). We make two amendments to thestandard version of this model. One is to allow the degree of dis-cretion given to workers with the same skill to vary across firms.This is a simple amendment that is commonly made to generatewithin-group wage inequality in this type of model (e.g. Layardet al., 1991). Second, we assume that, as autonomy is typicallyvalued in liberal democratic societies, workers value not only thewage associated with a job but also the amount of discretion itgives. With these amendments, we show that the degree of within-group wage inequality can increase when preferences change suchthat the wage becomes more highly valued relative to autonomy onthe job.

This is a potentially significant result because there is not onlycasual evidence (e.g. Harry Enfield’s comic character, ‘Load-samoney’) that the 1980s was a decade when ‘money’ became rela-tively more highly valued, there is also evidence of such attitudinalchange in the USA and the UK from the World Values Surveys ofthe period. We document this in the next section. Hence preferencechange in these countries might help explain the growth of theirwithin-group wage inequality. Furthermore, as the same surveydata for continental Europe suggest little or no change of this kindin their preferences (also see the next section), this difference mighthelp explain why the change in the overall distribution of wages incontinental Europe was less marked in continental Europe than theUSA and the UK during this period.

2. Attitude change in the USA, the UK, and continental Europe

Attitudes are regularly tested in most countries by asking asample population a set of questions. However, the same questionsare rarely asked in the same country at different times or in differentcountries at the same time. The World Values Survey project is anexception. It has been sampling attitudes in the major industrializedcountries on a comparable basis since the early 1980s. Four waveshave been completed so far.1 In the USA and Western Europe thesewere conducted in 1981, 1990, 1995, and 1999/2000. The pioneeringwork in this field was undertaken by Ronald Inglehart (1990). Heheads the project and there is a separate group concerned with

44 Sara Connolly — Shaun Hargreaves Heap

© 2007 The AuthorsJournal compilation © CEIS, Fondazione Giacomo Brodolini and Blackwell Publishing Ltd. 2007

values in Europe (see Barker et al., 1992). Their questions test awide range of attitudes. We focus here on those that relate to workas they provide some indication of how worker preferences towardsdifferent aspects of a job might have been changing. In particular,one question asks the following:

Here are some aspects of a job that people say are important. Pleaselook at them and tell me which you personally think are important ina job.

There are 15 aspects in total. Each has been chosen because itbelongs to one or other generic attribute of a job: either its materialor personal fulfilment or status or social attributes. The choice ofthese generic attributes reflects the research questions of the project.Our concern is much narrower. It is with a possible change inthe relative valuation of the wage as compared with degree ofdiscretion/autonomy on the job. Fortunately there is a direct ques-tion on the importance of good pay; unfortunately there is no directquestion on attitudes to autonomy on the job, although one comesvery close and others from the 15 listed aspects of a job are alsodirectly relevant.

Table 1 reproduces the proportion rating one of the materialattributes, ‘good pay’, as important in various countries in 1981 and1990 and the proportions rating what are referred to as the ‘per-sonal fulfilment’ aspects of jobs as important in these years becausethese items seem closely connected to the degree of discretion/autonomy on a job, particularly the first. These items are:

• ‘an opportunity to use initiative’;• ‘a responsible job’;• ‘a job in which you can achieve something’;• ‘a job that meets one’s abilities’; and• ‘an interesting job’.

The connection is plain with the first three as it is difficult to imaginehow one could have ‘initiative’ or feel a sense of personal ‘achieve-ment’ or ‘responsibility’ in a job unless there was significant dis-cretion on the job. Equally jobs that are ‘interesting’ are also mostlikely to be those that offer some personal discretion. ‘A job thatmeets one’s abilities’ is the only one in this list that perhaps has lessconnection with job autonomy. But as change in the value attachedto this is not importantly different from the change in the other

45Preference Change and Increasing Wage Inequality


Tab

le1.

Goo

dpa

yve

rsus

pers

onal

fulfi

lmen

t

Per

cent

sayi

ng..

.im

port

ant

US

AU

KN

ethe

rlan

dsF

ranc

eG

erm

any

Ital

yS

pain

1981

1990

1981

1990

1981

1990

1981

1990

1981

1990

1981

1990

1981

1990

Goo

dpa

y80

.285

.260

.069

.354

.069

.754

.053

.773

.973

.864

.671

.778

.076

.1P

erso

nalf

ulfil

men

tit

ems

Use

init

iati

ve54

.052

.449

.644

.744

.763

.432

.037

.762

.859

.337

.047

.537

.034

.0R

espo

nsib

lejo

b58

.656

.638

.440

.226

.445

.337

.753

.254

.353

.924

.533

.236

.031

.0A

chie

vem

ent

73.8

72.1

60.4

64.2

26.9

44.3

30.4

41.9

61.6

62.0

43.0

54.8

37.0

37.6

Mee

tsab

iliti

es58

.657

.546

.640

.648

.373

.231

.842

.869

.770

.647

.855

.252

.048

.0In

tere

stin

gjo

b72

.369

.077

.670

.942

.060

.652

.658

.870

.771

.544

.058

.544

.046

.1A

vera

gepe

rson

alfu

lfilm

ent

63.5

61.5

54.5

52.1

37.7

57.4

36.9

46.9

63.8

63.5

39.3

49.8

41.2

39.3

Rat

io:g

ood

pay/

pers

onal

fulfi

lmen

t1.

261.

391.

101.

331.

431.

211.

461.

151.

161.

161.

641.

431.

891.

93

Sou

rce:

Wor

ldV

alue

sSu

rvey

san

dE

urop

ean

Val

ues

Surv

ey.



‘personal fulfilment’ items, we use the average figures for personalfulfilment as a measure of attitudes towards discretion/autonomyon the job.

To obtain an index of the relative importance attached to thewage as compared with discretion, we have produced a ratio of theproportion rating ‘good pay’ important to the proportion rating‘personal fulfilment’ important. The per cent change in this ratioover the 1980s is illustrated in Figure 1.

Two things stand out here. First, whichever of the ‘personalfulfilment’ items is used, its importance fell relative to that of‘good pay’ in the UK and the USA in this period, suggesting that,like all good comic characters, Harry Enfield’s ‘Loadsamoney’was picking up on a change in the Anglo-American zeitgeist.Money does seem to matter more relatively at the end of the 1980sthan at the beginning. Second, there is little evidence of a similarchange in attitudes in continental Europe. The relative importanceof some personal fulfilment items falls in some cases, but whenthis happens it is small and is typically outweighed by an oppositechange with respect to the relative importance of the other per-sonal fulfilment items. Thus, using the average change in all thepersonal fulfilment items, either the wage became relatively lessimportant (as in the Netherlands, France, and Italy) or there waslittle or no change at all in its overall relative importance (as inGermany and Spain).

Figure 1. Change in ratio of pay/fulfilment 1981–90

25

20

15

10

5

0

USA UK France Germany Italy SpainChange

Netherlands–5

–10

–15

–25

–20



3. Wage setting with attitude

In this section, we consider the effects of such attitude changesin an efficiency wage model (e.g. Akerlof and Yellen, 1990; Katz,1986; Yellen, 1984). The virtue of amending a well-known modelis that, by avoiding any further complications, one can readilydistinguish the influence of such attitudinal changes. The effi-ciency wage model commends itself for this purpose because thereis evidence that efficiency wage considerations play some role inexplaining the inter-industry differences in wages for the sameskill in the USA (see Krueger and Summers, 1998). So a change inthe efficiency wage process seems a promising place to lookfor an explanation of the change in the degree of intra-skill wageinequality.

To focus on within-group wage inequality, we consider aneconomy where there is one type of worker. Efficiency wage modelswhere there is one type of worker are characterized by two features:(i) a production function for each firm where output (y) depends onthe effort per worker (e) and the number of workers (l); and (ii) abehavioural relation where effort per worker depends on the re-lation between the actual wage offered by an employer (w) and areference wage (wR), where the reference wage depends on theequivalent wage elsewhere (wE) for jobs using the same skill and onthe chances of gaining such jobs. To avoid needless controversy, weshall use the functional forms that are commonly found in theliterature to represent each feature.

Thus, with respect to the first feature, we allow for the influenceof effort on output to vary across firms in a manner that depends onthe degree of discretion given to workers. Following Layard et al.(1991) the degree of discretion on the job at firm ‘i’ is indexed by avariable ‘a’ such that the effective units of labour are calculated forfirm ‘i’ as e li

ai× . The production function for ‘i’ is given by

y f e li iai

i= ×( ). [1]

The idea here is that the technology or the organization of produc-tion at different firms will allow more or less discretion to workersand that the influence of effort on output is the greatest whereworkers have the most discretion. The profit-maximizing wage inthis setting satisfies a natural extension of the Solow elasticitycondition:



d de w w e ai i i i i( )( ) = 1 . [2]

This introduces the first influence of discretion in the model. Itmeans that high-discretion firms will push the wage to a point wherethe elasticity of effort is lower than in low-discretion firms. Ceterisparibus, this makes the wage and level of discretion complementaryas high-discretion firms will tend to raise their wage; and the in-tuition is easy to grasp because high-discretion firms have more togain from workers exercising effort than do low-discretion firms. Inthis way the efficiency wage model generates a distribution of wagesfor workers with the same skill and so potentially explains intra-skill wage inequality.

With respect to the second feature, we begin with Summers’s(1988) and what is effectively also Akerlof’s (1982) representation:

e w w ki i= −( ) +R ,λ [3]

where l < 1 and k is normalized hereafter as zero.A simple extension of this when workers value positively several

aspects of the job is to allow for workers to be motivated by the gapbetween the overall value of the remuneration package (which nowhas several dimensions and not just the wage) at firm i (ri) and thereference remuneration package (rR), as in [3′ ]:

e r ri i= −( )R λ. [3′]

In particular, we assume that workers value two aspects of the job,the wage and the degree of discretion on the job, and that the valueof the remuneration package depends on a linear combination ofthese two elements, as in [4]:

r a wi i i= + −( )β β1 . [4]

The positive valuation of discretion is not implausible. The scopefor workers to make choices is set by the degree of discretion on thejob and it is often argued that the extent of choices available to aperson is valued independently of the particular choices that theymake [see, for example, Sen (1997), and more generally those inthe liberal-democratic tradition who value autonomy]. The justifi-cation for the linear combination of the two elements in [4] dependson what underpins the effort relation in [3] (or [3′]). On one



interpretation, this relation reflects a gift exchange between workersand employers and depends for its detail on the prevailing effortnorm (e.g. Akerlof, 1982). As these norms have not been consideredin any depth, it does not seem unreasonable to assume that theycombine the elements of the job in a simple linear manner. Onanother interpretation, the relation arises from the utility-maximizing decision of individuals who are conscious of how shirk-ing can lead to job loss (e.g. Shapiro and Stiglitz, 1984). In this casethe linear relation in [4] comes from the workers’ utility functionsthat are linear in these terms; and we show in the Appendix how theprecise relations in [3′] and [4] can be derived from a simple shirkingmodel.

The conceptual understanding of how attitude changes, likethose documented in Section 2, connect with wage setting is likely todepend on the interpretation of the effort relation. With Akerlof’sinterpretation, it would be natural to assume that the change inattitudes reflects a change in the norms that affect the gift exchange;whereas with the utility-maximizing interpretation, the source ofthe attitude change would be a change in workers’ preferences.Fortunately, whichever interpretation is preferred the actual ana-lytical representation of the attitude changes in the USA and theUK is the same: it is captured by a fall in b, the parameter capturingthe relative weight attached to considerations of autonomy as com-pared with the wage in the valuation of a remuneration package.

The final point of detail is the reference remuneration package.This is given by the average value of the remuneration packageelsewhere multiplied by the probability of getting such a job, whichwe take to be equal to one minus the unemployment rate (1 - u).Thus,

r a wR = + −( )β β1 , [5]

where a and w are respectively the average levels of autonomy andwage for this group of workers.

Combining [3′], [4], and [5] produces

e w u w a u ai i i= −( ) − −( )[ ]+ − −( )[ ]{ }1 1 1β β λ. [6]

This reveals the second (and counterveiling) influence that thedegree of discretion has on wage setting in this amended efficiencywage model. When a firm has above (or below) average levels of



discretion on the job, this lowers (or raises) the wage that is neces-sary to produce any particular level of effort; and the extent of thismodification depends on the relative importance workers attach todiscretion.2 Again the intuition is easy to recover. When workersvalue discretion and they work at above average discretion firms,they need less of a wage differential to motivate them than would bethe case if they did not value discretion. This in turn supplies theintuition behind Proposition 1. When the relative value attached todiscretion by workers falls, this effect becomes weaker and so thewage at above average discretion firms rises.

Formally, when [6] is used in the revised Solow condition [2] forprofit maximization, the wage set becomes

w a w u a u ai i i= −( )[ ] −( ) − −( )[ ] − −( )[ ]{ }1 1 1 1 1λ β β . [7]

Summing [7] over all firms, and noting that in equilibriumSwi /n = w and Sai /n = a, yields

w a u ua w ai iλ β β−( ) = −( )[ ]− ( )1 cov . [8]

Equations [7] and [8] implicitly give the relation between any wage,wi, and the average wage, w , and, as we are interested in how this isaffected by a fall in b, we totally differentiate these two relationsand solve them to remove the du terms. The result is

d d d .w a w a a ai i i1 1 1 1−( ) − −( ) = − −( ) −( )[ ]λ λ β β [9]

This is the basis for Proposition 1.

Proposition 1. A change in worker preferences that increases relativevalue attached to the wage component of a job offer to the detrimentof the value placed on the degree of autonomy (i.e. db < 0) leads firmswith above (below) average autonomy to increase (decrease) theirwage relative to the average.

Proof. When db < 0 and ai > a, then the right-hand side is positiveand 1 - ail < 1 - al. Hence dwi > dw . When db < 0 and ai < a, thenthe right-hand side is negative and 1 - ail > 1 - al; and hence inthese circumstances dwi < dw . �

When workers at above average discretion firms enjoy higherwages than those at below average discretion firms, Proposition 1suggests that a change in preferences/norms like that observed in



the USA and the UK in the 1980s (see Section 2), would havestretched these within-group wage relativities.3 In turn, thisproposition together with the evidence that preferences werechanging, if at all, in the opposite way in continental Europewould help explain the difference in the developments in wageinequality in these countries as compared with the UK and theUSA.

4. Conclusion

Atkinson (1997, 1999) has argued in the context of a wage bar-gaining model that a change of norms in the USA and the UKmight help explain the growth of inequality in those countries [seeBenabou and Tirole (2005) for related work on the role of differ-ent attitudes]. This paper complements that earlier work by intro-ducing preference change into an efficiency wage model and bydocumenting the differences in preference change in the USA andthe UK as compared with continental Europe. In particular weshow how a change in preferences towards the monetary aspectsof a job and away from valuing autonomy on the job (reflecting achange in attitudes or norms) in the USA and the UK might havecontributed to the observed growth of within-group wage inequal-ity in those countries. At the same time the absence of suchchanges in continental Europe might help explain why the growthof wage inequality has been much lower there than in the USAand the UK. Naturally the model and the evidence only makepreference changes a potential part of the explanation of whathappened to the distribution of wages in this period. Nevertheless,it is a potentially interesting part because within-group wageinequality in the USA and the UK and the contrast with con-tinental Europe have been difficult to explain entirely satisfacto-rily (e.g. Fortin and Lemieux, 1997; Freeman, 1995; Johnson,1997; Katz and Murphy, 1992; Wood, 1995).

Of course, it is always possible to argue that preference change ofthis sort should not be treated as exogenous. For instance, it mightbe suggested through an appeal to the ideas of cognitive dissonanceremoval that this change in preferences was a response to anobserved prior increase in wage inequality. But, even if preferencechange was made endogenous in this way to some other set offactors that were driving the growth of wage inequality, the modelhere demonstrates how such change, whether induced or not, might



have (further) contributed to the growth of wage inequality in thisperiod. Indeed the general point is that while the habit of takingpreferences as primitives in economics is often a source of strength,it is also a weakness when, as the evidence presented here suggests,preferences do actually change in ways that can affect economicoutcomes.

Appendix

Consider a simplified version of an intertemporal shirking modelwhere there are two time periods and firms make a single wage offerfor both periods. All workers have preferences over discretion,wages, and effort for each period given by the following utilityfunction:

U a w e= + −( ) −β β θ1 .

A worker must choose between shirking (i.e. e = 0) and not shirkingin period 1. There is a probability p that a shirker will be caught andfired, in which case their utility return in period 2 from undertakingan alternative activity is given as ‘R’. As period 2 is the last period,there is no penalty from shirking in this period and so all workersshirk.

With a discount rate of ‘r’, the return over both periods fromchoosing the strategy of not shirking in period 1 is given by

β β β βθa w e a w r+ −( ) − + + −( )[ ] +( )1 1 1 .

The expected return over both periods from shirking in period 1 isgiven by

β β β βa w p a w p R r+ −( ) + + −( )[ ]+ −( ){ } +( )1 1 1 1 .

To prevent shirking the first expression must be greater than orequal to the second and, as there is no reason for a firm to pay morethan is necessary to stop shirking, the two can be set equal. Thisyields the following condition for no shirking, which relates theeffort level to the wage:

e a w R p rθ β β= + −( ) −[ ] −( ) +( )1 1 1 .



This is effectively the same as equation [3′] above with q = 1/l, asthe additional multiplicative constant, (1 - p)/(1 + r), would notaffect the results of the paper.

Notes

1 Fieldwork for a fifth survey was undertaken in 2005.2 To put this slightly differently, wages and discretion here are substitutes in

worker utility functions whereas the earlier relationship in equation [2] captures acomplementarity between them in production. The overall relationship betweenwages and discretion thus depends on the relative strength of these two effects.

3 It might be objected that the preference changes documented in Section 2 arerather broader and only map imperfectly on to attitudes towards the specific jobattribute of ‘discretion on the job’. There would seem, however, to be a close matchbetween the scope for ‘initiative’ and the extent of ‘discretion on the job’ and so theevidence on attitudes towards ‘using initiative’ is perhaps the most telling for ourargument. The change in the ratio of the per cent saying that ‘good pay’ isimportant to those saying that ‘using initiative’ is important is qualitatively verysimilar to change in the ratio of ‘good pay’ to the broader set of ‘personal fulfil-ment’ characteristics reported in Table 1. In particular, there is a similarly large risein this ratio in the UK, and the same broad difference emerges between the UK andthe USA, where there are large positive changes in this ratio, and continentalEuropean countries where the average change is negative.

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Preference Change and Increasing Wage Inequality

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