Income comparison, income formation, and subjective well-being: New evidence on envy versus signaling

• Income comparison involves an envy and a signaling element.
• In the 1990s envy was dominant in West Germany.
• In the 1990s signaling was dominant in East Germany.
• Envy and signaling effects changed after labor market reforms.
• Fairness and uncertainty of income may explain those changes.

Drawing on the distinction between envy and signaling effects in income comparison, this paper uses panel data on subjective well-being from Germany over the period 1991–2009 to study whether the nature of income comparison has changed in the process of economic development and institutional change. We conceptualize a person's comparison income as the income predicted by indicators of her productivity and examine if comparison effects have changed with changes in the income–productivity relationship. We find that (i) after a series of institutional reforms that affected income formation, incomes are now better explained by productivity than they were before the reforms, (ii) before the reforms, signaling was the dominant concern in East Germany whereas envy was dominant in West Germany, (iii) since the reforms, no dominance of envy or signaling effects can be found.