Reservation Wage Research Articles

Reservation Wages and the Wage Flexibility Puzzle

Abstract Using micro data for the UK and Germany, we provide novel evidence on the cyclical properties of reservation wages and estimate that wages and reservation wages are characterised by moderate and very similar degrees of cyclicality. Several job search models that quantitatively match the cyclicality of wages tend to overpredict the cyclicality in reservation wages. We show that this puzzle can be addressed when reservation wages display backward-looking reference dependence. Model calibrations that allow for reference dependence match the empirically observed cyclicality of wages and reservation wages for plausible value of all other model parameters.

A COMPARATIVE STUDY OF DETERMINATIONS OF RESERVATION WAGE EXPECTATIONS AMONG UNEMPLOYED MEN AND WOMEN IN SRI LANKA

The "reservation wage" concept indicates the minimum compensation a person is willing to accept when seeking employment. This study aims to determine how reservation wage expectations differ between unemployed men and women in Sri Lanka. This analysis used secondary data extracted from the Sri Lanka Labour Force Survey (2021), which was conducted by the Department of Census and Statistics, and encompasses a sample size of 1,567 total unemployed, comprising 739 unemployed males and 828 unemployed females. A semi-log model was applied separately to the unemployed men, the unemployed women and the total unemployed to achieve the study's objective. The results indicated that gender significantly influences reservation wage expectations among unemployed men and women. Compared with women, unemployed men have a higher reservation wage expectation. Noteworthy variables, including household size, age, and unemployment duration, exhibit varying degrees of insignificance in shaping reservation wage expectations for both genders. Finally, this study concluded that the reservation wage expectations among unemployed men and women in Sri Lanka are significantly affected by various demographic, household socio-economic and regional geographical factors. This study provides valuable insights for policymakers to foster gender equality and labour market inclusivity to reduce the gender gap in Sri Lanka.

Do income tax incentives for job creation targeting young workers in SMEs stimulate employment? Evidence from South Korea

Faced with high unemployment and labor mismatches, many countries have mainly focused on stimulating labor demand through job creation policies. However, empirical evidence regarding their effectiveness is mixed, while the impact of labor supply-side policies remains underexplored. This study fills the gap by assessing the effectiveness of a labor supply-side policy—the Job Creation Income Tax Credit in Korea—which provides tax incentives for workers under 35 employed in small and medium-sized enterprises (SMEs). Using event-study and difference-in-differences models with national survey data from 2016 to 2019, we find insignificant effects on overall SME employment among individuals aged 32–34. While no significant effects are observed on regular workers, only low-educated male SME workers ineligible for the credit transition to eligible temporary SME jobs. These findings highlight that modest tax credits are ineffective in promoting employment for highly educated young individuals due to their high reservation wages and inelastic labor supply.

Job Applications and Labour Market Flows

Abstract Job applications have risen over time, yet job-finding rates remain unchanged. Meanwhile, separations have declined. We argue that increased applications raise the probability of a good match rather than the probability of job-finding. Using a search model with multiple applications and costly information, we show that when applications increase, firms invest in identifying good matches, reducing separations. Concurrently, increased congestion and selectivity over which offer to accept temper increases in job-finding rates. Our framework contains testable implications for changes in offers, acceptances, reservation wages, applicants per vacancy, and tenure, objects that enable it to generate the trends in unemployment flows.

The Gendered Impact of Digital Jobs Platforms: Experimental Evidence from Mozambique

Abstract This study examines the impact of digital labor-market platforms on jobs outcomes using a randomized encouragement design embedded in a longitudinal survey of Mozambican technical-vocational college graduates. We differentiate between platforms targeting formal jobs, where jobseekers direct their search, and informal tasks, where clients seek workers. Our analysis reveals statistically insignificant intent-to-treat and complier-average treatment effects for headline employment outcomes in the full sample. Notably, while the average male moderately benefits from platform usage, women do not. Rather, they are less responsive to the encouragement nudge, and female treatment compliers report higher reservation wages and lower job search. This suggests digital platforms can inadvertently perpetuate gender disparities in labor markets.

Urban Unemployment Duration Analysis in Post-Reform China

We link China’s accession to the WTO with the unemployment duration of urban jobseekers. Using data from the Rural Urban Migration in China (RUMiC) of a survey conducted in early 2008, we construct an inflow sample of those who started a period of joblessness between January 2002 and December 2007 to estimate the unemployment duration for local urban jobseekers. Deploying the Cox Proportional Hazards and Accelerated Failure Time models, we find reduced trade policy uncertainty significantly shortens unemployment duration, with hazard-rate varying across internal in-migrants and urban natives, due to variations in job accessibility and reservation wages.

Homeownership, the unemployed and financial hardship

We follow 3,826 Australian unemployed persons, approximately half of whom are homeowners. We conduct a matching analysis and find that homeownership reduces both experienced and perceived financial hardship. Building on recent findings in the literature that the presence of financial hardship deteriorates job search quality (i.e., stressors like financial hardship lead to the adoption of haphazard rather than focused job search strategies), we introduce financial hardship as a novel channel through which homeownership affects labour market outcomes of the unemployed. In our matching analysis, we include historical labour market performance and personality traits linked to mobility preferences, to address endogeneity. We also confirm that homeownership reduces residential mobility and increases neighbourhood social capital but find no effect on reservation wages of the unemployed. Considering declining homeownership rates across the OECD in recent years, our findings are both timely and imperative to understand the effect of homeownership on labour market outcomes of the unemployed.

Old-age support policy and fertility with strategic bequest motives

This paper presents an analysis of the effects of public old-age support on individuals’ fertility decisions and on the long-term equilibrium in an overlapping generation economy with strategic bequest motives. Parents must pay their adult children at least the reservation wage to receive informal old-age support from them (individual rationality constraint). Formal old-age support is financed through wage taxes on children. The increased present value of formal old-age support tends to increase old-age utility, thereby decreasing the family support demand and decreasing savings for the old age. The increased wage tax reduces the opportunity cost of child-rearing time, thereby increasing the fertility rate. The effects of increased formal old-age support on per-worker capital and labor are indeterminate, as is the effect on the long-term lifetime utility of individuals. A strategic bequest motive might engender a higher fertility rate than that of the social optimum.

Ridesourcing platforms thrive on socio-economic inequality

Limited available market share data seems to suggest that ridesourcing platforms benefit from, even thrive on, socio-economic inequality. We suspect that this is associated with high levels of socio-economic inequality allowing for cheap labour as well as increasing the share of travellers with a considerably above-average willingness to pay for travel time savings and comfort. We test the relation between inequality and system performance by means of an agent-based simulation model representing within-day and day-to-day supply-demand interaction in the ridesourcing market. The model captures travellers’ mode choice with a heterogeneous perception of relevant time components, as well as job seekers’ participation choice with heterogeneous reservation wage. Our experiments cover scenarios for the entire spectrum ranging from perfect equality to extreme inequality. For several of such scenarios, we explore alternative platform pricing strategies. Our analysis shows a strong, positive relationship between socio-economic inequality and ridesourcing market share. This is the outcome of the combination of cheap labour and time-sensitive ridesourcing users, reinforced by network effects inherent to ridesourcing markets. We find that driver earnings are minimal in urban areas with large socio-economic inequality. In such contexts, drivers are likely to face a high platform commission, and yet, fierce competition for passengers.

Looking beyond the workplace: Trade unions and the politics of poverty in Italy

AbstractThere is ample literature to suggest that labour's interests are at odds with the extension of income protection to ‘outsiders’. Until recently, Italian unions were reluctant, if not outright obstructive, towards the introduction of a minimum income scheme (MIS). After the 2008 financial crisis and its dramatic social and economic consequences, however, the three major labour confederations supported the introduction of a national MIS, openly embracing the fight against income insecurity. Why did trade unions overturn their conservative approach and eventually support social assistance safety nets? Drawing upon textual evidence and semi‐structured interviews, the paper suggests that the Italian labour movement, albeit with differences among the confederations, has radically changed its preferences towards social assistance. Unions gradually shifted from a ‘deservingness’ logic (championing ‘hard work’) to one of reservation wage (the ‘we are all in the same boat’ narrative). Weaknesses in labour market peripheries have encouraged the labour movement to defend those at risk of poverty. The Italian case has wider implications for actors' preferences and roles in welfare reform, showing that structural and strategic factors may encourage labour to join coalitions that support welfare ‘de‐dualisation’ pathways.

Modeling the employment decisions of young men and women in nine European countries: An application of random utility theory and revealed preference

In this paper we examine the decisions of over 15,000 young adults aged 18–35 from nine European countries to choose employment over unemployment or remaining in education. Instead of focusing only on who makes those decisions as is typically done, we attempt to answer the question of why a particular decision is made. Using data from the Cultural Pathways to Economic Self-sufficiency and Entrepreneurship (CUPESSE) project, we estimate a series of country and gender-specific conditional logit (CLGT) models adjusted for individual work values, soft skills, demographic characteristics and local labor markets. We find that young women in Czechia, Germany, Greece, Hungary and Italy and both men and women in Spain and the United Kingdom, respond to exogenous wage offers providing some evidence for job search theory and for the reservation wage hypothesis. Our uptake rate simulations show that a 10% increase in wages have the potential to increase employment by as little as 2 percentage points in the UK and by as much as 14 percentage points in Czechia and Spain. Further, if unemployment benefits are also simultaneously reduced by 10% employment increases in these latter countries by 20 and 17 percentage points. We demonstrate the ways that revealed preference (RP) analysis can aid policy makers through strength of preference, uptake rate and willingness-to-pay applications.

Reservation Raises: The Aggregate Labour Supply Curve at the Extensive Margin

Abstract We measure desired labour supply at the extensive (employment) margin in two representative surveys of the U.S. and German populations. We elicit reservation raises: the percent wage change that renders a given individual indifferent between employment and nonemployment. It is equal to her reservation wage divided by her actual, or potential, wage. The reservation raise distribution is the nonparametric aggregate labour supply curve. Locally, the curve exhibits large short-run elasticities above 3, consistent with business cycle evidence. For larger upward shifts, arc elasticities shrink towards 0.5, consistent with quasi-experimental evidence from tax holidays. Existing models fail to match this nonconstant, asymmetric curve.

Polluted Job Search: The Impact of Poor Air Quality on Reservation Wages

Polluted Job Search: The Impact of Poor Air Quality on Reservation Wages

Marriage, Divorce and Reservation Wages

Marriage, Divorce and Reservation Wages

Sexual objectification of women in media and the gender wage gap: Does exposure to objectifying pictures lower the reservation wage?

Using an online experiment, we investigate the influence of sexual objectification in media on reservation wages. In the experiment, subjects (843 women and 307 men in the main analysis) are asked to evaluate advertisements in women's magazines. In the treatment groups, the ads portray women in sexually objectifying poses, while the poses are neutral in the control group. The main research hypothesis is that sexual objectification tends to make women self-objectify, i.e., they internalize the view of the objectifying images, and as a result, they lower their reservation wage. We find that women in the treatment groups do self-objectify: Women who were exposed to the objectifying images described themselves with words related to body shape or size significantly more often than women in the control group. Adding a warning text about the fact that photoshopped images can create unrealistic body ideals did not mitigate the self-objectification. However, we do not find any effect of sexual objectification on women's reservation wages. If we take the results at face value, they do suggest that the objectification of women in media, while having important psychological and emotional effects, does not seem to affect women's reservation wages, at least not directly.

Peer effects through receiving advice in job search: An experimental study

We study experimentally whether receiving advice from an experienced decision-maker improves decisions in an infinite-horizon search task where individuals typically choose a lower reservation wage than the optimal value. In the experiment, advisors complete 10 rounds of search and leave advice to their advisees who also complete 10 rounds of search after seeing the advice. We find that advisors tend to recommend a smaller reservation wage than their own lower than optimal choices. They formulate recommendation based on their reservation wage choice in the period when they accepted an offer, which is typically their lowest reservation wage choice over the search spell. Advisees follow this recommendation and choose a reservation wage that is further away from the optimal value leading to significant treatment differences between the advisors and advisees. Eliciting advice specifically for the starting period of the search round does not result in such negative effect of advice. Overall, we find that receiving advice does not facilitate the optimal choice in the search task.

Oligarchy, underutilized capacity, and government policy

We examine an oligarchic economy where only elites can establish firms. In monopolistic competition when the size of the elite is sufficiently small, there is an absolute exclusive equilibrium where wages are driven to the reservation wage. Because of the possession of market power by firms, total equilibrium output is insufficient to warrant the employment of the entire labor force, leading to inadequate aggregate demand for labor and underutilized capacity. The economy inefficiently operates inside its production possibilities frontier. Then, the adoption of rather unorthodox left-wing fiscal and labor policies may boost capacity utilization and lead to a Pareto improvement.

Discretionary Extensions to Unemployment Insurance Compensation and Some Potential Costs for a McCall Worker

Unemployment insurance provides temporary cash benefits to eligible unemployed workers. Benefits are sometimes extended by discretion during economic slumps. In a model that features temporary benefits and sequential job opportunities, a worker’s reservation wages are studied when policymakers can make discretionary extensions to benefits. A worker’s optimal labor-supply choice is characterized by a sequence of reservation wages that increases with weeks of remaining benefits. The possibility of an extension raises the entire sequence of reservation wages, meaning a worker is more selective when accepting job offers throughout their spell of unemployment. The welfare consequences of misperceiving the probability and length of an extension are investigated. Properties of the model can help policymakers interpret data on reservation wages, which may be important if extended benefits are used more often in response to economic slumps, virus pandemics, extreme heat, and natural disasters.

How do digital platforms affect employment and job search? Evidence from India

We use a randomized control trial to evaluate whether digital platforms improve employment outcomes among vocational training graduates in India. We uploaded a random subset of graduates to a digital platform, and assigned some to receive many text messages about job opportunities. We find evidence of voluntary unemployment: graduates respond to platform access by increasing their reservation wages, and by working significantly less. As good job offers fail to materialize on the platform, some graduates adjust their expectations downwards and resume working. These findings suggest that youth’s beliefs about the effectiveness of matching interventions may reduce their potential impacts on employment.

Interactions between job search and housing decisions: A structural estimation

AbstractHousing and financial market shocks affect frictional labor markets. We structurally estimate a model of job search with accumulation of liquid and residential wealth and randomly persistent house prices. Using NLSY data from 1978 to 2000, we show that reservation wages and nonemployment increase in total wealth and respond to the composition of wealth, home prices and financial markets' tightness. We cluster counties of residence by HPI growth and find a residential wealth effect on labor markets that erodes with fast home price growth. When we counterfactually fix downpayment rates above observed trajectories, nonemployment becomes one percentage point higher in counties of average or fast home price growth and 1.2 percentage points lower where home prices are stagnant. Fixing interest rates at 2% generates a 0.5 percentage point decline in nonemployment in counties with no home price growth, but no changes where price growth is average or fast.