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A Contribution to the Empirics of Reservation Wages

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  • Krueger, Alan B.

    () (Princeton University)

  • Mueller, Andreas I.

    () (Columbia University)

Abstract

This paper provides evidence on the behavior of reservation wages over the spell of unemployment using high-frequency longitudinal data. Using data from our survey of unemployed workers in New Jersey, where workers were interviewed each week for up to 24 weeks, we find that self-reported reservation wages decline at a modest rate over the spell of unemployment, with point estimates ranging from 0.05 to 0.14 percent per week of unemployment. The decline in reservation wages is driven primarily by older individuals and those with personal savings at the start of the survey. The longitudinal nature of the data also allows us to test the relationship between job acceptance and the reservation wage and offered wage, where the reservation wage is measured from a previous interview to avoid bias due to cognitive dissonance. Job offers are more likely to be accepted if the offered wage exceeds the reservation wage, and the reservation wage has more predictive power in this regard than the pre-displacement wage, suggesting the reservation wage contains useful information about workers' future decisions. In addition, there is a discrete rise in job acceptance when the offered wage exceeds the reservation wage. In comparison to a calibrated job search model, the reservation wage starts out too high and declines too slowly, on average, suggesting that many workers persistently misjudge their prospects or anchor their reservation wage on their previous wage.

Suggested Citation

  • Krueger, Alan B. & Mueller, Andreas I., 2014. "A Contribution to the Empirics of Reservation Wages," IZA Discussion Papers 7957, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp7957
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    References listed on IDEAS

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    Cited by:

    1. Marinescu, Ioana E. & Wolthoff, Ronald P., 2015. "Opening the Black Box of the Matching Function: The Power of Words," IZA Discussion Papers 9071, Institute for the Study of Labor (IZA).
    2. Samuel Bentolila & J. Ignacio García-Pérez & Marcel Jansen, 2017. "Are the Spanish long-term unemployed unemployable?," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 8(1), pages 1-41, March.
    3. Abebe, Girum & Caria, Stefano & Fafchamps, Marcel & Falco, Paolo & Franklin, Simon & Quinn, Simon & Shilpi, Forhad, 2017. "Matching firms and workers in a field experiment in Ethiopia," LSE Research Online Documents on Economics 86572, London School of Economics and Political Science, LSE Library.
    4. Gabriel Chodorow-Reich & Loukas Karabarbounis, 2016. "The Cyclicality of the Opportunity Cost of Employment," Journal of Political Economy, University of Chicago Press, vol. 124(6), pages 1563-1618.
    5. Brown, Sarah & Taylor, Karl, 2015. "The reservation wage curve: Evidence from the UK," Economics Letters, Elsevier, vol. 126(C), pages 22-24.
    6. Barbanchon, Thomas Le & Rathelot, Roland & Roulet, Alexandra, 2017. "Unemployment Insurance and Reservation Wages: Evidence from Administrative Data," CAGE Online Working Paper Series 330, Competitive Advantage in the Global Economy (CAGE).
    7. repec:bla:econom:v:84:y:2017:i:335:p:365-392 is not listed on IDEAS
    8. Andreas I. Mueller, 2017. "Separations, Sorting, and Cyclical Unemployment," American Economic Review, American Economic Association, vol. 107(7), pages 2081-2107, July.
    9. Francesca Carta & Lucia Rizzica, 2016. "Female employment and pre-kindergarten: On the unintended effects of an Italian reform Abstract: We theoretically show that when mothers need to buy childcare services not only if they work but also i," Working Papers 091, "Carlo F. Dondena" Centre for Research on Social Dynamics (DONDENA), Università Commerciale Luigi Bocconi.
    10. repec:eee:pubeco:v:158:y:2018:i:c:p:79-102 is not listed on IDEAS
    11. Arni, Patrick, 2015. "Opening the Blackbox: How Does Labor Market Policy Affect the Job Seekers' Behavior? A Field Experiment," IZA Discussion Papers 9617, Institute for the Study of Labor (IZA).
    12. Moshe A. Barach & John Horton, 2017. "How Do Employers Use Compensation History?: Evidence from a Field Experiment," CESifo Working Paper Series 6559, CESifo Group Munich.
    13. Sascha Drahs & Luke Haywood & Amelie Schiprowski, 2018. "Job Search with Subjective Wage Expectations," Discussion Papers of DIW Berlin 1725, DIW Berlin, German Institute for Economic Research.
    14. Lichter, Andreas, 2016. "Benefit Duration and Job Search Effort: Evidence from a Natural Experiment," IZA Discussion Papers 10264, Institute for the Study of Labor (IZA).
    15. Mazur, Karol, 2016. "Can welfare abuse be welfare improving?," Journal of Public Economics, Elsevier, vol. 141(C), pages 11-28.
    16. Joanne Lee & Karen Needels & Walter Nicholson, "undated". "A Longitudinal Survey of Unemployment Insurance Recipients in Two Regions in California," Mathematica Policy Research Reports 982c8e2b780e479ea249e7b05, Mathematica Policy Research.
    17. John Ameriks & Joseph S. Briggs & Andrew Caplin & Minjoon Lee & Matthew D. Shapiro & Christopher Tonetti, 2017. "Older Americans Would Work Longer If Jobs Were Flexible," NBER Working Papers 24008, National Bureau of Economic Research, Inc.
    18. Paweł Strzelecki & Joanna Tyrowicz, 2015. "Inferring the Adequacy of Wage Expectations Among the Non-Working," Gospodarka Narodowa, Warsaw School of Economics, issue 6, pages 51-69.
    19. Takayuki Oishi & Jun Tomioka & Shin Sakaue, 2018. "Intermediary Organizations in Labor Markets," Working Papers e124, Tokyo Center for Economic Research.
    20. Meier, Mario & Obermeier, Tim, 2017. "Employer Screening, Unemployment Stigma and Optimal Unemployment Insurance," EconStor Preprints 148303, ZBW - German National Library of Economics.
    21. 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.

    More about this item

    Keywords

    unemployment duration; unemployment; reservation wage; unemployment insurance;

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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