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What Determines the Reservation Wages of Unemployed Workers? New Evidence from German Micro Data

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  • Prasad, Eswar

    (Cornell University)

Abstract

This paper provides new empirical evidence on the relationship between reservation wages of unemployed workers and macroeconomic factors – including aggregate and local unemployment rates, generosity of the unemployment compensation system and characteristics of the wage structure – as well as individual-specific determinants, including proxies for general and specific human capital, length of unemployment spell and alternative income sources. The longitudinal aspect of the dataset (the German Socio-Economic Panel) provides an interesting perspective on how reservation wages change over time and how they correlate with accepted wage offers for workers who make the transition from unemployment to employment. The findings have important policy implications as well, since they shed some light on the disincentive effects of the German tax and transfer system for the labor supply and employment decisions of unemployed workers at different points of the skill/offer wage distribution.

Suggested Citation

  • Prasad, Eswar, 2003. "What Determines the Reservation Wages of Unemployed Workers? New Evidence from German Micro Data," IZA Discussion Papers 694, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp694
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    References listed on IDEAS

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    1. Eswar S. Prasad, 2004. "The Unbearable Stability of the German Wage Structure: Evidence and Interpretation," IMF Staff Papers, Palgrave Macmillan, vol. 51(2), pages 354-385.
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    Cited by:

    1. Pannenberg, Markus, 2007. "Risk Aversion and Reservation Wages," IZA Discussion Papers 2806, Institute of Labor Economics (IZA).
    2. Mário Centeno & Pedro Portugal & John T. Addison, 2004. "Reservation Wages, Search Duration, and Accepted Wages in Europe," Working Papers w200413, Banco de Portugal, Economics and Research Department.
    3. Prasanna Tambe & Xuan Ye & Peter Cappelli, 2019. "Paying to Program? Engineering Brand and High-Tech Wages," NBER Working Papers 25552, National Bureau of Economic Research, Inc.
    4. Vera A. Adamchik & Josef C. Brada & Arthur E. King, 2009. "Are Transition Economy Workers Underpaid?," Working Papers 278, Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies).
    5. Sarah Brown & Jennifer Roberts & Karl Taylor, 2010. "Reservation wages, labour market participation and health," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 173(3), pages 501-529, July.
    6. Marco Caliendo & Ludovica Gambaro & Peter Haan, 2009. "The impact of income taxation on the ratio between reservation and market wages and the incentives for labour supply," Applied Economics Letters, Taylor & Francis Journals, vol. 16(9), pages 877-883.
    7. Dawson, Chris, 2017. "The upside of pessimism − Biased beliefs and the paradox of the contented female worker," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 215-228.
    8. Izabela Ostoj, 2018. "Reasons full-time students of economics in Poland undertake jobs," Managerial Economics, AGH University of Science and Technology, Faculty of Management, vol. 19(1), pages 117-131.
    9. John T. Addison & José A. F. Machado & Pedro Portugal, 2013. "The Reservation Wage Unemployment Duration Nexus," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(6), pages 980-987, December.
    10. John Addison & Mário Centeno & Pedro Portugal, 2009. "Do Reservation Wages Really Decline? Some International Evidence on the Determinants of Reservation Wages," Journal of Labor Research, Springer, vol. 30(1), pages 1-8, March.
    11. María Angeles Davia & Oscar D. Marcenaro Gutiérrez, 2008. "Exploring the link between employment search time and reservation," Hacienda Pública Española / Review of Public Economics, IEF, vol. 186(3), pages 91-121, October.
    12. Brown, Sarah & Taylor, Karl, 2011. "Reservation wages, market wages and unemployment: Analysis of individual level panel data," Economic Modelling, Elsevier, vol. 28(3), pages 1317-1327, May.
    13. Sarah Brown & Karl Taylor, 2008. "Reservation Wages, Expected Wages and Labour Market Outcomes: Analysis of Individual Level Panel Data," Working Papers 2008008, The University of Sheffield, Department of Economics, revised Jul 2008.
    14. Prasanna Tambe & Xuan Ye & Peter Cappelli, 2020. "Paying to Program? Engineering Brand and High-Tech Wages," Management Science, INFORMS, vol. 66(7), pages 3010-3028, July.
    15. Yordanos Gebremeskel, 2015. "Job Creation and Employment-Gender-Gap among Micro and Small Enterprises," Business and Management Research, Business and Management Research, Sciedu Press, vol. 4(2), pages 1-12, June.
    16. Leppin Julian S., 2014. "The Estimation of Reservation Wages: A Simulation-Based Comparison," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 234(5), pages 603-634, October.
    17. María A. Davia & Óscar D. Marcenaro-Gutiérrez, 2007. "Exploring the link between employment search time and reservation wages in Southern Europe," Economic Working Papers at Centro de Estudios Andaluces E2007/13, Centro de Estudios Andaluces.
    18. Liina Malk, 2015. "Determinants of reservation wages: empirical evidence for Estonia," Bank of Estonia Working Papers wp2014-8, Bank of Estonia, revised 20 Jan 2015.
    19. Unay-Gailhard, İlkay, 2016. "Job access after leaving education: A comparative analysis of young women and men in rural Germany," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 1355-1381.
    20. Nordlund, Madelende & Strandh, Mattias, 2014. "The relation between economic and non-economic incentives to work and employment chances among the unemployed," Working Paper Series 2014:23, IFAU - Institute for Evaluation of Labour Market and Education Policy.

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    More about this item

    Keywords

    reservation wage; labor supply disincentives; offer wage distribution; unemployment and employment determinants;
    All these keywords.

    JEL classification:

    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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