Jiyan Bai

This paper studies how workers’ ordinal wage-rank concerns affect individual search behavior and labor-market outcomes. Using the National Longitudinal Survey of Youth 1997, I show that among similar workers, a 10 percentage point deterioration in wage rank requires approximately a 13 percent wage increase to keep predicted job satisfaction unchanged. I extend an on-the-job search model with endogenous search effort to study the aggregate implications of this comparison behavior. In the model, stronger rank concerns make low-wage jobs less attractive while increasing the option value of search across wages. As a result, rank concerns raise reservation wages and strengthen search incentives. In equilibrium, however, the higher reservation threshold reduces the set of acceptable offers, lowers aggregate job mobility, increases unemployment, compresses accepted-wage dispersion, and reduces social welfare. In a counterfactual exercise where the offer wage dispersion becomes more unequal while the mean offer wage is preserved, rank concerns partially mitigate the adverse mobility effects for low-wage workers by raising the lower bound of accepted wages, while amplifying the welfare gains from a thicker upper tail.