Reservation Wage Research Articles

Reservation Wages and the Wage Flexibility Puzzle

Reservation Wages and the Wage Flexibility Puzzle

Migration, Remittances, Labour Market and Human Capital in Senegal

This study investigates how migration and remittances affect labour market participation in Senegal. Further, it examines the effect of remittances on human capital development. The results reveal that migration and remittances reduce labour market participation of household members with migrants. More importantly, we find that the labour market participation depends negatively on the level of remittances, which supports the reservation wage theory. We also find that remittances increase expenditures on human capital development, as approximated by education and health spending. These findings hold true across specifications and econometric estimation procedures.

Trade reforms, mark-ups and bargaining power of workers: the case of Ethiopian manufacturing firms

There is a predominant preposition in trade theory that firms operating in an imperfect market with trade barriers often set prices with a positive mark-up. Workers using insider information tend to bargain and share the rent from firms’ market power; which is negatively associated with to decline with trade reforms. Empirical evidences are, nonetheless, mixed. Trade reforms that took place between 1991 and 2002 in Ethiopia inspired the study to investigate the proposition. Using firm level unbalanced data of manufacturing firms employing more than 100 permanent workers between 1996 and 2007, a model of mark-up with labor bargaining power was estimated using random effects and LDPDM. The estimates of the two models are similar. Albeit huge inter-firm variations, the average estimated mark-ups has not only been positive but also increased even after the reform. This may be perhaps because of the 17.5 percent weighted average tariff rate that has still been maintained after the reform. Workers’ bargaining power parameter estimate remained negative over the study period; possibly because of high unemployment and low reservation wage. The rate of rent extraction from workers declined on average in the post reform period. Thus, further opening up of markets may bring a competitive push to improve firm performance, reduce market power of firms and the rent extraction from workers. There is a need to attract additional investment (both public and private) in the economy and addressing causes of capacity underutilization of incumbent firms may lessen unemployment problems and thereby improve workers bargaining power and their earnings. Keywords: Trade reform, mark-up, bargaining power, rent, trade unions

Metoda oceny adekwatności oczekiwań płacowych osób niepracujących

Reservation wages and expected wages constitute different categories, both conceptually and empirically. The aim of this article is the construction of a method for inferring the adequacy of both kinds of wage expectations among persons who are not employed. This method is used to verify the hypothesis about the adequacy of reservation wages and expected wages among the unemployed in Poland. The key element of the analysis in this study is to what extent the reservation wages and wage expectations of the unemployed are in alignment with market conditions. We exploit a unique source of data on expected wages (National Bank of Poland survey) as well as data on reservation wages (Labour Force Survey) and develop a series of parametric and non-parametric counterfactual distributions for the registered unemployed. Our results indicate that expected wages are higher than reservation wages and continue to be positively correlated with wage pressure. We find that reservation wages in Poland from 2011 to 2014 were not excessive. This is important because if the wage expectations of the unemployed are in excess of market evaluation, unemployment and wage pressures prevail.

Happy Birthday, You're Fired! The Effects of an Age-Dependent Minimum Wage on Youth Employment Flows in the Netherlands

This paper investigates the effects of the age-dependent minimum wage on youth employment flows in the Netherlands. The Dutch minimum wage for workers aged 15-23 is defined as a step-wise increasing function of a worker's calendar age. At the age of 23, workers become eligible for the "adult" minimum wage which does not increase further. This creates an incentive for firms to discriminate against employees on the basis of their age, substituting more expensive older workers with younger ones. In order to grasp the size of these effects, I analyze monthly flows in and out of employment using administrative records for the entire youth population of the Netherlands. I account for the time remaining until workers' next birthdays, exploiting the fact that firms are facing a sharp discontinuity in labor costs in the month when a worker turns one year older.The results show a significant increase in job separation around the time of this discontinuity: the probability of job separation increases by 1.1% in the three calendar months which are closest to a worker's next birthday. This effect exhibits substantial heterogeneity with respect to a worker's age, showing that young and inexperienced workers are more likely to be affected by the discontinuities. The size of the effect also varies by the sector of employment, being particularly large for supermarket employees. Job accession peaks just after workers' birthdays, representing both entry of the workers with higher reservation wages and re-employment of the workers whose jobs are dissolved around the time of the discontinuity.

Unemployment in Ghana: a cross sectional analysis from demand and supply perspectives

Purpose– The purpose of this paper is to analyse the causes of unemployment in Ghana from both labour demand and supply perspectives based on most recent cross sectional data set from one nationally representative household survey and a baseline survey for Millennium Development Support.Design/methodology/approach– A logit regression estimation technique is applied to two different household survey data sets of 2008 and 2013 to capture the effect of labour demand and supply on unemployment.Findings– Using education and age as capability variables to represent supply factors, unemployment is found to increase with education, and declines with age, confirming higher unemployment rate among the youth, than the old. The paper also observes strong influence of demand factors on unemployment based on relatively higher incidence of unemployment fulltime jobseekers relative to part-time jobseekers and seekers of formal or wage-employment and self-employment or SMEs compared with those seeking any job. Other factors such as the individual’s reservation wage, marital status, sex and poverty status as well as their rural-urban location are also found to cause unemployment in Ghana.Practical implications– Unemployment as a result of the inability of individuals to obtain a job of their choice in the midst of strong economic growth in Ghana suggests weak employment content of growth. In contrast, an increasing phenomenon of unemployment with education also reflects a problem of skill mismatch between skills churn out by education and training institutions and skills requirement by firms in the labour market.Originality/value– The originality of the paper and its contribution to existing literature largely emanate from the inclusion of demand factors in a cross sectional analysis of causes of unemployment.

Trade, Technologies, and the Evolution of Corporate Governance

Do international trade and technological change influence how firms create incentives for human capital? I present a model that incorporates agency problems into a framework with firm heterogeneity and human capital. My model indicates that trade liberalizations and skill-biased technological change alter the way how the largest firms in an economy incentivize their managers. Increases in managerial reservation wages lead to a reduction in corporate governance investments and a rise in performance compensation since monitoring managers becomes less efficient. Using data on CEO compensation and entrenchment opportunities in public industrial firms in the U.S., I document strong empirical regularities in support of the model predictions. Firms allow for more managerial entrenchment and offer larger CEO compensation when their industries become more open to trade or when production becomes more I.T. intensive.

Employment and wages before and after incarceration – evidence from Hungary

We study the entry into legitimate employment and earnings of a large sample of convicts released from Hungarian prisons in 2002–08. The employment rate of the prisoners falls short of 20% one year before incarceration, and they earn 25% below the national average. We identify the effect of prison by exploiting differences in the timing of incarceration and also by estimating fixed-effect models. For convicts with a single prison term, we find an initially negative effect on employment, which turns positive after a year, though the impact on earnings is permanently negative. A comparison with recidivists suggests that these results are driven by a drop in the reservation wages of ‘reformed’ criminals. This reading is supported by further data showing that the average ex-inmate tends to make increased efforts to find a legitimate source of livelihood and support in job search.

The effects of immigration in frictional labor markets: Theory and empirical evidence from EU countries

Immigrants are newcomers in a labor market. As a consequence, they lack host-country-specific labor market knowledge and other country-specific and not directly productive valuable assets affecting their relative bargaining position with employers. We introduce this simple observation into a search and matching model of the labor market and show that immigrants increase the employment prospects of competing natives. To test the predictions of our model, we exploit yearly variations between 1998 and 2004 in the share of immigrants within occupations in 13 European countries. We identify the impact of immigrants on natives׳ employment rate using an instrumental variable strategy based on historical settlement patterns across host countries and occupations by origin country. We find that natives׳ employment rate increases in occupations and sectors receiving more immigrants. Moreover, we show that this effect varies depending on immigrants׳ characteristics and on host country labor market institutions which affect relative reservation wages.

Overeducation in the Early Career of Secondary Education Graduates

Based on monthly observations of their employment and overeducation status in the first seven years after leaving education, we use optimal matching sequence analysis to construct a typology of entry patterns of Flemish secondary education graduates. We find that for a significant number of young people, overeducation constitutes a persistent problem, affecting about half of the sample for nearly the full observation period. Investigating the risk factors shows factors, such as, having lower human capital endowments or facing job search constraints enhancing the risk of following disadvantageous trajectories. A lower reservation wage seems to make being persistently overeducated more likely. Yet, starting as ‘overeducated’ does not necessarily lead to being stuck as overeducated in the rest of the career. About 7 per cent of our sample succeeds in entering an adequate position even after being overeducated for a relatively long period.

Testing for monotonicity under endogeneity: An application to the reservation wage function

This paper develops a test for monotonicity of nonparametric regression models under endogeneity, which in its generality is novel in the literature. The test statistic, which is built upon a second order U-process, introduces ‘correction terms’ based on control functions that purge the endogeneity. The test has a non-standard asymptotic distribution from which asymptotic critical values can directly be derived. Furthermore, the test statistic is extended to accommodate multivariate (exogenous) regressors. Consistency against general alternatives is proved and the finite sample properties of the test are examined in a Monte Carlo experiment. The test is used to formally assess the monotonicity of the reservation wage as a declining function of elapsed unemployment duration, which has implications for underlying job search models. This relationship is difficult to measure due to the simultaneity of both variables. Results for UK data indicate that reservation wage functions do in fact not decline monotonically thereby contradicting some partial equilibrium job search models.

Matching with Moral Hazard: Assigning Attorneys to Indigent Defendants

Each year, over a hundred thousand defendants who are too poor to pay for a lawyer are assigned counsel. Existing procedures for making such assignments are essentially random and have been criticized for giving indigent defendants no say in choosing the counsel they are assigned to. In this paper, we model the problem of assigning counsel to indigent defendants as a matching problem. A novel aspect of this matching problem is the moral hazard component on the part of counsel. Within the model, we show that holding the total expenditure for counsel fixed and changing the matching procedure to accommodate defendants' and attorneys' preferences will make defendants worse off. More precisely, if we switch from random matching to stable matching, defendants become worse off because stable matching exacerbates the moral hazard problem on the part of counsel. In addition, we find conditions on reservation wages of attorneys under which random matching is the efficient way to allocate defendants to counsel.

Compensation contract design for vocational graduates with general and specific skills

This paper considers an optimization problem for an enterprise (she) who employs a graduate (he) getting qualification from vocational schools by designing a compensation contract. The vocational school graduate’s reservation wage depends on his professional skills and the degree to which the skills are general. Moreover, the vocational graduate has asymmetric information about the professional skills which are unknown to the enterprise. In order to maximize the enterprise’s expected profit and elicit the vocational graduate’s true skills, a compensation contract optimization model is established based on principal-agent theory. The analysis mainly demonstrates that the optimal pay-performance sensitivity is positively related with the graduate’s professional skills and the degree to which professional skills are general in the setting of asymmetric information. Furthermore, when general skills are relatively large, the optimal pay-performance sensitivity plays a more important role than the fixed wage in the total compensation structure. In contrast, the enterprise only pays a fixed wage to the vocational graduate and the pay-performance sensitivity is zero in a benchmark setting of symmetric information. Finally, the sensitive analysis shows the effects of the related parameters on the optimal pay-performance sensitivity, respectively.

Optimal health investment and preference structure

This paper develops a general equilibrium framework to study the role of preference structure (additive, multiplicative and a convex combination of the two) in connecting consumption, health investment, stock of health and capital, and their effects on the wage rate and on productivity. We show that the elasticities of health production, health investment and health cost determine jointly how health influences thewagerate.Weexaminethesteadystateandtheequilibriumdynamicsofthemodel. In the case of additive preferences, the existence of equilibrium and the stability of the dynamic system require that the ratio of the elasticities of the cost of health and health investment is greater than the elasticity of the production function of health. Health stock can have either positive or negative effects on wages via a mechanism of reservation wages. When preferences are multiplicative, the condition of the existence

India’s Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS): Wages, Reservation Wages and Programme Participation in Chitradurga District of Karnataka

We evaluate India’s Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). Using data from extensive primary surveys of MGNREGS beneficiaries and non-beneficiaries in Chitradurga district of Karnataka, we find that women tended to benefit more from the programme. This is a major MGNREGS contribution because women have always been paid less than men in farms and construction sites. The wages NREGS beneficiaries got were well below their asking wages (which was ₹ 207 a day), being only ₹ 98 a day on an average. The estimation of reservation wages shows that higher current wages increase reservation wages. The elasticity of reservation wage with respect to work experience is negative. We use a two-step regression model to understand the determinants of participation in the programme and of NREGS wages. We conclude that the programme has had a favourable impact on reducing rural poverty.

Wage, productivity and unemployment: microeconomics theory and macroeconomics data

We confront microeconomics theory with macroeconomics data. Unemployment results from two main micro-level decisions of workers and firms. Most of the efficiency wage and bargaining theories predict that over the business cycle, unemployment falls below its natural rate when the worker’s real wage exceeds the reservation wage. However, these theories have weak empirical support. Firm’s decision predicts that when the worker’s real wage exceeds the marginal product of labour (MPL), unemployment increases above its natural rate. Accounting for this microeconomic decision helps explain almost all the fluctuations of US unemployment.

Interactions between Job Search and Housing Decisions: A Structural Estimation

In this paper, we investigate to what extent shocks in housing and financial markets account for wage and employment variations in a frictional labor market. To explain these interactions, we use a model of job search with accumulation of wealth as liquid funds and residential real estate, in which house prices are randomly persistent. First, we show that reservation wages and unemployment are increasing in total wealth. And, second, we show that reservation wages and unemployment are also responsive to the composition of wealth. Specifically, when house prices are expected to rise, holding a larger share of wealth as residential real estate tends to increase reservation wages, which deteriorates employment transitions and increases unemployment. We estimate our model structurally using National Longitudinal Survey of Youth data from 1978 to 2005, and we find that more relaxed house financing conditions, in particular lower down payment requirements, decrease employment rates by 5 percentage points in the short run and by 2 percentage points in the long run. We also find that worse labor market conditions immediately increase homeownership rates by up to 5 percent points, whereas in the long run homeownership decreases by 8 percentage points.

Why are unemployed aged fifty and over less likely to find a job? A decomposition analysis

Reemployment chances for unemployed aged fifty and over are low compared to those of younger persons. To explain the different chances, the job search literature has largely focused on the job search behavior of unemployed individuals. Based on job search models, we propose that not only job search behavior, but also wage setting behavior, attitudinal variables and personal variables impact the difference in reemployment opportunities. Besides gaining insight into which variables explain the difference in reemployment opportunities, we also test how much of the difference each of these variables explains. We do this by drawing on a decomposition analysis. Using data from 647 recently unemployed, we find that about one third of the reemployment gap can be explained by the variables suggested by job search models, mostly in terms of age differences in search behavior, educational levels and reservation wage. Hence, about 70 % can be ascribed to other factors, such as employer preferences for those aged between 18 and 49. Implications of these results for theory, policy and practice are discussed.

Wildlife conservation, labor supply and time values in rural Botswana

AbstractTo improve wildlife conservation incentives in community-based natural resource management programs, a better understanding of rural communities' willingness to engage in wildlife conservation jobs is needed. We implement a discrete choice model explaining reservation wages for nine conservation jobs using contingent behavior data from rural Botswana residents. We present a model in which the conditional indirect utility function incorporates a more general value of time than has previously been used, and this specification outperforms the standard model. Sample estimates indicate that reservation wages are modestly higher for women than for men, and that residents have higher reservation wages for jobs requiring more exertion or involving more danger.

The destabilizing effects of the social norm to work under a social security system

We study employment dynamics in an OLG model with unemployment benefits financed by taxing wages, and with a defined contribution plan. The novelty with respect to recent studies of the effects of social security in this context is that we introduce a social norm to work, shaping the worker’s participation decision, and hence affecting the reservation wage. We find that a strong social norm to work destabilizes conventional wisdom by reversing the negative effects of social security on employment, and destabilizes the economy by facilitating the emergence of endogenous fluctuations.