The effect of unemployment duration on reservation wages: Evidence from Belgium

Abstract

This paper studies the effect of unemployment duration on asking (reservation) wages. We provide new evidence based on unique longitudinal data on unemployed workers in Belgium, who were surveyed about self-reported reservation wages at the start of the unemployment spell, and after 3 and 6 months of unemployment duration. Our estimates suggest that reservation wages decline with unemployment duration by about 0.4 percent per month, or 5 percent per year, and that cross-sectional estimates are biased upward. We find stronger declines among men and among workers who earned high wages in their previous jobs. The paper discusses these findings in the light of learning models and discusses the implications of falling reservation wages for the debate on the effect of unemployment on wages.