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The Reservation Wage Unemployment Duration Nexus

  • Addison, John T.

    ()

    (University of South Carolina)

  • Machado, José

    ()

    (Universidade Nova de Lisboa)

  • Portugal, Pedro

    ()

    (Banco de Portugal)

A thorny problem in identifying the determinants of reservation wages and particularly the role of continued joblessness in their evolution is the simultaneity issue. We deploy a natural control function approach to the problem that involves conditioning elapsed duration on completed unemployment duration in the reservation wage equation. Our analysis confirms that the use of elapsed duration alone compounds two separate and opposing influences. Only with the inclusion of completed duration is the negative effect of continued joblessness on reservation wages apparent. For its part, the completed duration coefficient suggests that higher reservation wages negatively influence the probability of exiting unemployment.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5077.

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Length: 11 pages
Date of creation: Jul 2010
Date of revision:
Publication status: published in: Oxford Bulletin of Economics and Statistics, 2013, 75 (6), 980-987
Handle: RePEc:iza:izadps:dp5077
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  1. Paolo Sestito & Eliana Viviano, 2011. "Reservation Wages: Explaining Some Puzzling Regional Patterns," LABOUR, CEIS, vol. 25(1), pages 63-88, 03.
  2. Lancaster, Tony & Chesher, Andrew, 1983. "An Econometric Analysis of Reservation Wages," Econometrica, Econometric Society, vol. 51(6), pages 1661-76, November.
  3. Katharine G. Abraham & Henry S. Farber, 1986. "Job Duration, Seniority and Earnings," Working papers 407, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Addison, John T. & Centeno, Mario & Portugal, Pedro, 2004. "Reservation Wages, Search Duration, and Accepted Wages in Europe," IZA Discussion Papers 1252, Institute for the Study of Labor (IZA).
  5. Stephen R. G. Jones, 1988. "The Relationship Between Unemployment Spells and Reservation Wages as a Test of Search Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 103(4), pages 741-765.
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