Reservation Wage Research Articles

Does the COVID-19 Pandemic Shock Change the Reservation Wage?

The COVID-19 pandemic can change the reservation wage because of changes in people’s preferences due to the risk of infection, the rapid rise of work at home, or a worsened household economy. Furthermore, the changing reservation wage changes the decision to work, especially for the second wage earner. This study examines the effect of the pandemic shock on the reservation wage using the difference-in-differences method and Japanese data about job seekers’ desired wage. We find that after the first wave of the pandemic, the reservation wages for part-time (full-time) job increase (decrease) in urban prefectures. Especially, the reservation wages for part-time managerial (construction and mining) occupations increase (decrease). These managerial jobs include managing shops like restaurants and bars, where it is difficult to maintain sales during pandemic and a high risk of infection exists. People may not prefer these aspects. In contrast, the pandemic shock worsened the household economy. This may decrease the reservation wage in jobs where money is received instantly, such as part-time construction and mining jobs. Finally, contrary to our expectation, the reservation wage of professional jobs that seem to be familiar with work at home does not decrease. Furthermore, the decrease in reservation wages in the prior period increases the labor market participation rate.

Labor market transitions of members of opposite-sex couples: nonparticipation, unemployed search, and employment

An empirical analysis of labor market transitions for spouses in couples is implemented. Object of study are transitions between the states of nonparticipation, unemployed search, and employment. Motivated by a model of household search, the emphasis is on spousal variables and interactions. Additionally, a proxy for the business cycle is included in the analysis, and household specific unobserved heterogeneity is accounted for. Results show that female transitions into nonparticipation (both out of unemployed search and employment) are positively affected by the husband's income (while no effect is found for transitions out of nonparticipation). Men seem to move from employment into unemployed search easier the higher is the wife's income. Since the wife having an income is in turn strongly accociated with female participation, this suggests that households with a participating wife are better able to deal with unemployment of the husband. A supplementary analysis with reservation wages and numbers of applications points in the same direction. Husbands' reservation wages are only sensitive to his own unemployment income if the wife is nonparticipating. This implies that unemployment benefits have a different role in households with the husband as a sole earner compared to dual earner households.

The Value of Knowing Drivers' Reservation Wage in Ride Sharing Systems

The Value of Knowing Drivers' Reservation Wage in Ride Sharing Systems

Larger firms pay more in the gig economy

We propose a theory of gig economies in which workers participate in a shared labor pool utilized by multiple firms. Since firms share the same pool of workers, they face a trade-off in setting pay rates; high pay rates are necessary to maintain a large worker pool and thus reduce the likelihood of lost demand, but they also lower a firm’s profit margin. We prove that larger firms pay more than smaller firms in the resulting pay equilibrium. These diseconomies of scale are strong too; firms smaller than a critical size pay the minimal rate possible (the workers’ reservation wage), while all firms larger than the critical size earn the same total profit regardless of size. This scale disadvantage in labor costs contradicts the conventional wisdom that gig companies enjoy strong network effects and suggests that small firms have significant incentives to join an existing gig economy, implying gig markets are highly contestable. Yet we also show that the formation of a gig economy requires the existence of a large firm, in the sense that an equilibrium without any firms participating only exists when no single firm has enough demand to form a gig economy on its own. The findings are consistent with stylized facts about the evolution of gig markets such as ridesharing.

Bringing Them In or Pushing Them Out? The Labor Market Effects of Pro-cyclical Unemployment Assistance Reductions

We exploit variation from an unanticipated labor market reform in 2012 Spain to causally estimate the effects of pro-cyclical unemployment assistance (UA) reductions on job search behavior and re-employment outcomes. Shorter benefit durations effectively bring individuals back to work and reduce non-employment duration. However, they also induce displacements out of the labor force and strong substitution patterns towards other, less generous, welfare programs, highlighting the social insurance role of long-term benefits during economic downturns. Despite the sharp drop in non-employment duration, we also document a significant decrease in re-employment wages, consistent with reduced workers' reservation wages and limited duration dependence. Heterogeneity analyses show that relatively younger workers are the ones that are brought back into re-employment in lower-quality jobs, while older workers are pushed out of the labor force. Looking at responses over the non-employment spell, we provide evidence against the standard assumption of forward-looking behavior of benefit recipients, as we do not detect any change in workers' behavior before benefit exhaustion. Overall, we estimate that the reform induced only moderate fiscal savings for the government.

The Effect of Fertility on Female Labor Supply in a Labor Market with Extensive Informality

This paper presents new evidence on the causal relationship between fertility and female labor supply. We particularly focus on how informal employment affects post-fertility labor supply behavior of mothers. We employ an instrumental variable strategy based on an unused data source for twin births in Turkey—a large developing economy with extensive labor informality. We find that fertility causally affects female labor supply. After the first twin birth, female labor supply declines significantly and the ones who drop out of the labor force are mostly the informally employed women. Following further increases in family size introduced by multiple second and third births (i.e., unanticipated increase from 1 kid to 3 kids, and from 2 kids to 4 kids), formally employed females start dropping out of the labor force and hours of work decline. Wages and job search intensity also decline for females as fertility increases. We also investigate the impact of fertility on labor supply of fathers. Unlike females, males increase their labor supply, which mostly comes from the increase in informal employment—possibly due to a decline in reservation wages. Accordingly, wages decline, hours of work increase, and job search activity shifts from formal to informal search methods for males. Overall, these results suggest that informally employed women tend to quickly drop out of the labor force after giving birth. Fathers, on the other hand, become more likely to accept inferior, low-pay, and informal job offers as fertility goes up. The results are robust to using alternative IV specifications based on sex composition of children.

Do workers share in firm success? Pass-through estimates for New Zealand

We study the extent to which firm financial performance is passed on to workers in the form of higher wages and how this has changed over 2002-2018. We measure financial performance as value added per worker and as quasi-rents. Quasi-rents better approximate the resources available to be shared between workers and firms as the measure takes into account the rental cost of capital as well as the reservation wages. We estimate the reservation wage bill for each firm using estimates from a two-way fixed-effect model and further decompose the pass-through into contributions from worker sorting and rent-sharing. Our IV estimates of pass-through are in the range of 0.12 and 0.19 for value added and 0.11 and 0.07 for quasi-rents. Worker sorting explains between 35% and 50% of pass-through. While the extent of overall pass-through is relatively stable over time, the contribution of worker sorting declines dramatically to explain almost none of the estimated pass-through.

The Effects of Extended Unemployment Benefits on the Reservation Wage: Evidence from a Benefit Extension in Taiwan

The Effects of Extended Unemployment Benefits on the Reservation Wage: Evidence from a Benefit Extension in Taiwan

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

We measure extensive-margin labor supply (employment) preferences 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 labor 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. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Refugee Return and Conflict: Evidence from a Natural Experiment

We estimate the causal effect of a large cash assistance program for refugee returnees on conflict in Afghanistan. The program led to a significant increase in repatriation. Leveraging historical returnee settlement patterns and previously unreleased combat records, we find that policy-induced refugee return had cross-cutting effects, reducing insurgent violence, but increasing social conflict. The program's cash benefits were substantial and may have raised reservation wages in communities where returnees repatriated. Consistent with this hypothesis, returnee encashment had heterogeneous effects on insurgent violence, decreasing use of labor-intensive combat, while also reducing the effectiveness of counterinsurgent bomb neutralization missions. Additionally, kinship ties and access to informal institutions for dispute resolution significantly offset the risks of refugee return for communal violence. These results highlight unintended consequences of repatriation aid and clarify the conditions under which refugee return affects conflict. Building social capital and legitimate, local institutions are key antecedents for safe refugee repatriation.

The impact of migration and remittances on labor supply in Tajikistan

Remittances from labor migrants abroad have become the largest component of financial flows to developing countries. While they are an important source of foreign currency for low-income countries, the impact of outmigration and remittances on the economic development of the sending country is ambiguous. To narrow this knowledge gap, this paper examines their impact on the domestic labor market, using the case of Tajikistan – a labor migrant contributor and remittance dependent country in Central Asia. Specifically, we estimate the impact of international migration and receipt of remittances on the labor supply decisions and employment of the family members left behind. To ensure rigorous inferences, we apply a control function approach using unique high-frequency household panel data. Our method enables us to correctly address the simultaneity of migration/remittance and labor supply decisions of the left-behind members. Our main estimates are that sending migrants reduces the labor supply of the left-behind members by 5.4 percentage points, and that receiving remittances reduces it by 10.2 percentage points, respectively. These findings suggest that the reservation wage effect of having a migrant member and receiving remittances is large and surpasses other positive effects they might have.

Unemployment Insurance and Job Search Behavior

AbstractHow does unemployment insurance (UI) affect unemployed workers’ search behavior? Search models predict that until benefit exhaustion, UI depresses job search effort and increases reservation wages. Over an unemployment spell, search effort should increase up to benefit exhaustion and stay high thereafter. Meanwhile, reservation wages should decrease up to benefit exhaustion and stay low thereafter. To test these predictions, we link administrative registers to data on job search behavior from a major online job search platform in France. We follow over 400,000 workers, as long as they remain unemployed. We analyze the changes in search behavior around benefits exhaustion and take two steps to isolate the individual response to unemployment benefits. First, our longitudinal data allows us to correct for changes in sample composition over the spell. Second, we exploit data on workers eligible for 12–24 months of UI as well as workers ineligible for UI, to control for behavior changes over the unemployment spell that are independent of UI. Our results confirm the predictions of search models. We find that search effort (the number of job applications) increases by at least 50% during the year preceding benefits exhaustion and remains high thereafter. The target monthly wage decreases by at least 2.4% during the year preceding benefits exhaustion and remains low thereafter. In addition, we provide evidence for duration dependence: workers decrease the wage they target by 1.5% over each year of unemployment, irrespective of their UI status.

Gender Differences in Job Search: Trading off COMMUTE AGAINST WAGE*

ABSTRACTWe relate gender differences in willingness to commute to the gender wage gap. Using French administrative data on job search criteria, we first document that unemployed women have a lower reservation wage and a shorter maximum acceptable commute than their male counterparts. We identify indifference curves between wage and commute using the joint distributions of reservation job attributes and accepted job bundles. Indifference curves are steeper for women, who value commute around 20% more than men. Controlling in particular for the previous job, newly hired women are paid after unemployment 4% less per hour and have a 12% shorter commute than men. Through the lens of a job search model where commuting matters, we estimate that gender differences in commute valuation can account for a 0.5 log point hourly wage deficit for women, that is, 14% of the residualized gender wage gap. Finally, we use job application data to test the robustness of our results and to show that female workers do not receive less demand from far-away employers, confirming that most of the gender gap in commute is supply-side driven.

Reservation Wages and Workers’ Valuation of Job Flexibility: Evidence from a Natural Field Experiment

Recent changes in labor arrangements have increased interest in estimating and understanding the value of job flexibility. We leverage a large natural i¬ eld experiment at Uber to create exogenous variation in expected market wages across individuals and over time. Combining this experiment with high frequency panel data on wages and individual work decisions, we document how labor supply responds to exogenous changes in expected market wages in a setting with virtually no restrictions on driver labor allocation. We find that there is i) systematic heterogeneity in labor supply responses both across drivers and within a driver over time, ii) significant fixed costs of beginning a shift, and iii) high rider demand when it is costly for drivers to work. These three findings motivate a model of labor supply with heterogenous preferences over work schedules, adjustment costs, and statistical dependence between market wages and the costs of driving. We recover the labor supply elasticities and reservation wages of this dynamic labor supply model via a combination of experimental estimates and other data moments. We then perform counterfactual analyses that allow us to examine how preference heterogeneity and adjustment costs influence the responses of workers’ to wage incentives as well as infer drivers’ willingness to pay for the ability to customize and adjust their work schedule. We also show that a static approach to the driver’s dynamic problem delivers materially different estimates of workers’ labor supply elasticities and their value of job flexibility.

Mobility, job accessibility and welfare from jobs in Bengaluru,India

ABSTRACT This study draws on a large household survey to identify the effective labour market of Bengaluru, India, the accessibility of its jobs and the degree to which they are welfare-enhancing. The average journey to work was 28 min, implying that Bengaluru’s effective labour market had increased since 2001. The survey showed that 81% of jobs were accessible within 20 min, while the reported reservation wage was found to depend on age, education and current wages. For a majority of respondents, the welfare from jobs was zero, and for 29% it was positive. The policy implications are examined.

Excess churn in integrated labor markets

The common European labor market enhances allocative efficiency, but certain institutional features may also trigger inefficient migration. As a job in a high-income country entails generous welfare and social insurance entitlements, migrants’ reservation wages may lie below their opportunity cost of labor. We show that this gives rise to an externality when employers and migrant workers can pass some of their remuneration costs onto taxpayers. Once welfare benefit entitlement is secured, the reservation wage of the migrant rises, giving the firm an incentive to replace the worker with a similar migrant willing to accept lower pay. This leads to excess churn—a reallocation of labor within firms that simultaneously involves a flow of employees to unemployment benefits and the hiring of similar workers. Based on Norwegian data, we present evidence of high excess churn rates in firms with many workers from the new EU member states.

On the social opportunity cost of unemployment

ABSTRACT The handling of unemployment is a central issue in cost–benefit analysis. Typically, the shadow price of employing an unemployed is derived by considering a marginal change in the employment constraint faced by an unemployed or rather an underemployed. In contrast, in this paper, we consider the discrete shift from unemployment to (full) employment. The result provides guidance how to estimate the social cost of recruiting otherwise unemployed to a project. It is shown that the social cost is overestimated by using the private reservation wage. The common practice of adding different cost items is shown to be flawed.

F.O.G. and Teleworking: Some Labor Economics of Covid-19

FOG (« fear of going back to work ») is a new acronym reflecting workers stress to become contamined by COVID-19. In response, firms have been offering protections, extending teleworking as a way to continue to work during the pandemics. Leveraging a classical epidemiologic SIR model, we study how pandemics such as COVID-19 affect labor market, when the labor productivity is tied to the value of interactions, and under wage negotiations. Despite relatively schematic, our modelling highlights that workers participation during pandemics is dependent on reservation wages, and that the final dynamics are also critically dependent on a mix of health and wealth factors such as age, work interactions, workers power, and productivity of interactions. In general, teleworking may be a way to restore work participation, even if teleworking may be less productive, to the extent that the productivity gap can be compensated by a much higher protection of workers.

Enriching the Lives of Marginalised Sections: Case of MGNREGS in Composite Andhra Pradesh, India

The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) initiated in 2006 is essentially a reaction to the jobless growth witnessed in the post-1991 reforms period. The Scheme seeks to improve the livelihoods of the marginalised sections in rural areas by generating wage employment. The article is an attempt to examine if the Scheme is really benefitting these sections as envisaged. Our village survey data of composite Andhra Pradesh (AP) brings to the fore the fact that the socially lowly placed scheduled castes (SCs), scheduled tribes (STs) and other backward castes (OBCs) were well represented among the beneficiaries of the Scheme, female participation in the Scheme was way beyond expectations, the Scheme was indeed the mainstay of the illiterate and the little educated that look for manual labour, and the otherwise rarely preferred elderly of the labour market found place in the Scheme and they could make significant contribution to earnings of poor households. It further throws up the finding that the Scheme was an important employment avenue to reckon with in the rural labour market and therefore, it increased the bargaining strength and the reservation wage rate of the labour force. Briefly, the Scheme contributed to inclusive growth.

Job search, occupational choice and learning

This paper investigates the labor market consequences of incomplete information about workers’ own job searching process and best occupations fitting to them. A search and learning model is provided in order to analyze these effects. In the model, search outcomes relay information about workers’ job finding abilities and appropriate occupations suited to them, and workers use this information to infer their types. Our theory explains how search outcomes during unemployment can change the beliefs of workers about their job finding ability and consequently affect their decisions including the occupational choices. Characterization of the model results in a simple value function with reservation level of prior belief property that is similar to reservation wage property. Some interesting facts about both micro and macro data are identified and our model’s explanation of these facts is discussed. Particularly, our characterization gives rational for why workers with less experience in searching have (1) longer unemployment duration and (2) higher probability of changing occupation by reemployment, and (3) why shifts in Beveridge curve may be observed. Theory can also be used to (4) explain the discouraged worker phenomenon.