Great expectations: Reservation wages and minimum wage reform

Abstract

Abstract This paper is the first causal study using quasi-experimental methods to identify the effect of minimum wages on the reservation wages of non-workers. We exploit variation in regional exposure to the introduction of a high-impact minimum wage in Germany in 2015, combined with survey responses about wage acceptance thresholds of job seekers. Results show a 16% increase in reservation wages among non-employed job seekers at the low end of the distribution during the period immediately following the reform. Over time, however, wage expectations revert to pre-reform levels. Our findings are suggestive of learning during the search process and further imply that minimum wages do not necessarily result in higher short-run labor force participation, as job seekers adjust their reservation wages accordingly.