AUTHOR COPY The Second Paycheck to Keep Up with the Joneses: Relative Income Concerns and Labor Market Decisions of Married Women Yongjin Park Economics Department, Connecticut College, 270 Mohegan Avenue, New London, CT 06320, USA. E-mail: ypark@conncoll.edu This paper provides a simple model and an empirical test of the effect of interpersonal income comparisons on labor supply. By focusing on the relative income of a full-time working man and its effect on the wife’s labor supply decision, we examine the role of relative income in labor supply decisions while avoiding the endogeneity problem that plagues the relative income–labor supply connection. The results show that the relative income of husbands plays an important role in the labor supply decisions of married women. The effects are economically meaningful and robust across various measures of relative income and reference groups. Eastern Economic Journal (2010) 36, 255–276. doi:10.1057/eej.2009.9 Keywords: Interdependent utility; relative income; social comparisons; labor supply of married women JEL: H23; D31; D62 INTRODUCTION Do relative income concerns affect human behavior? If so, do they count enough to influence labor supply? A growing empirical literature supports the ‘‘relative income’’ hypothesis that individuals are adversely affected when they perceive themselves to be economically deprived relative to their reference group. Clark and Oswald [1996], for example, found that the satisfaction levels reported by British workers (in the British Household Panel Survey) vary inversely with the wage levels of their peers. Alesina et al. [2003] found that individuals are less likely to report that they are happy when there is a high level of inequality in their country (or, in the case of the US, their state). Using individual-level panel data, Luttmer [2004], Ferrer-i-Carbonell [2005], and Vendrik and Woltjer [2007] Stutzer [2004] Senik [2007a, b] show that the higher earnings of neighbors or other reference group are associated with lower levels of self-reported happiness. Given this strong body of evidence on comparison-based utility functions, it is natural to ask whether the sense of relative deprivation is strong enough to affect economic decisions and therefore to be a predictor of actual economic behavior. This paper attempts to answer the question by examining the effect of relative income on labor supply behavior. The model presented in the next section captures the effect of relative income on an individual’s choice to work more hours by accounting for the influence of consumption of the well-to-do on the marginal utility of consumption for the less-well-off. The main result is that an individual’s labor supply is decreasing in the degree of the relative income of her family. We then examine this hypothesis by asking whether a wife’s labor force participation (LFP) decision depends on her husband’s relative income compared to his reference group. Eastern Economic Journal, 2010, 36, (255–276) r 2010 EEA 0094-5056/10 www.palgrave-journals.com/eej/