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Reservation Wages, Expected Wages and the Duration of Unemployment: Evidence from British Panel Data

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  • Brown, Sarah

    () (University of Sheffield)

  • Taylor, Karl

    () (University of Sheffield)

Abstract

In this paper we analyse the role of wage expectations in an empirical model of incomplete spells of unemployment and reservation wages. To be specific, we model the duration of unemployment, reservation wages and expected wages simultaneously for a sample of individuals who are not in work, where wage expectations are identified via an exogenous policy shock based upon the introduction of Working Family Tax Credits (WFTC) in the UK. The results from the empirical analysis, which is based on the British Household Panel Survey, suggest that WFTC eligibility served to increase expected wages and that expected wages are positively associated with reservation wages. In addition, incorporating wage expectations into the econometric framework was found to influence the magnitude of the key elasticities: namely the elasticity of unemployment duration with respect to the reservation wage and the elasticity of the reservation wage with respect to unemployment duration.

Suggested Citation

  • Brown, Sarah & Taylor, Karl, 2009. "Reservation Wages, Expected Wages and the Duration of Unemployment: Evidence from British Panel Data," IZA Discussion Papers 3981, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp3981
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    References listed on IDEAS

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    1. John T. Addison & Mário Centeno & Pedro Portugal, 2010. "Unemployment Benefits and Reservation Wages: Key Elasticities from a Stripped-Down Job Search Approach," Economica, London School of Economics and Political Science, vol. 77(305), pages 46-59, January.
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    12. Sarah Brown & Gaia Garino & Karl Taylor, 2008. "Mortgages and Financial Expectations: A Household-Level Analysis," Southern Economic Journal, Southern Economic Association, vol. 74(3), pages 857-878, January.
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    Cited by:

    1. Cecilia Garavito Masalías, 2010. "Vulnerabilidad en el empleo, género y etnicidad en el Perú," Revista Economía, Fondo Editorial - Pontificia Universidad Católica del Perú, vol. 33(66), pages 89-127.
    2. Mark Stater & Jeffrey B Wenger, 2017. "The Immediate Hardship of Unemployment: Evidence from the US Unemployment Insurance System," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 43(1), pages 17-36, January.
    3. Akiko Maruyama, 2016. "One-sided learning about one's own type in a two-sided search model," GRIPS Discussion Papers 15-26, National Graduate Institute for Policy Studies.
    4. Daniel Gutknecht, 2013. "Testing for Monotonicity under Endogeneity An Application to the Reservation Wage Function," Economics Series Working Papers 673, University of Oxford, Department of Economics.
    5. Akiko Maruyama, 2013. "Learning about one's own type: a search model with two-sided uncertainty," GRIPS Discussion Papers 12-24, National Graduate Institute for Policy Studies.

    More about this item

    Keywords

    unemployment duration; reservation wages; expected wages;

    JEL classification:

    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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