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Great expectations: Reservation wages and minimum wage reform

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  • Fedorets, Alexandra
  • Shupe, Cortnie

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.

Suggested Citation

  • Fedorets, Alexandra & Shupe, Cortnie, 2021. "Great expectations: Reservation wages and minimum wage reform," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 397-419.
    • Handle: RePEc:eee:jeborg:v:183:y:2021:i:c:p:397-419
    DOI: 10.1016/j.jebo.2021.01.006
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    Cited by:

    1. Ahlfeldt, Gabriel M. & Roth, Duncan & Seidel, Tobias, 2022. "Optimal minimum wages," LSE Research Online Documents on Economics 117750, London School of Economics and Political Science, LSE Library.
    2. Schröder, Carsten & König, Johannes & Fedorets, Alexandra & Goebel, Jan & Grabka, Markus M. & Lüthen, Holger & Metzing, Maria & Schikora, Felicitas & Liebig, Stefan, 2020. "The economic research potentials of the German Socio-Economic Panel study," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 21(3), pages 335-371.
    3. Caliendo Marco & Wittbrodt Linda & Schröder Carsten, 2019. "The Causal Effects of the Minimum Wage Introduction in Germany – An Overview," German Economic Review, De Gruyter, vol. 20(3), pages 257-292, August.
    4. Panos Sousounis & Gauthier Lanot, 2022. "Minimum Wage Effects on Reservation Wages," Journal of Labor Research, Springer, vol. 43(3), pages 415-439, December.
    5. Alexandra Fedorets, 2021. "12 Euro Mindestlohn: neue Erwartungen und alte Hürden," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 101(12), pages 929-932, December.
    6. Fischbacher, Urs & Neyse, Levent & Richter, David & Schröder, Carsten, 2022. "Adding household surveys to the behavioral economics toolbox: Insights from the SOEP Innovation Sample," Discussion Papers, Research Unit: Market Behavior SP II 2022-201, WZB Berlin Social Science Center.

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    More about this item

    Keywords

    Minimum wages; Reservation wage; Labor supply; Search;
    All these keywords.

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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