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The Reservation Wage Unemployment Duration Nexus

Author

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  • John T. Addison
  • José A. F. Machado
  • Pedro Portugal

Abstract

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.

Suggested Citation

  • John T. Addison & José A. F. Machado & Pedro Portugal, 2010. "The Reservation Wage Unemployment Duration Nexus," Working Papers w201026, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w201026
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    References listed on IDEAS

    as
    1. Kiefer, Nicholas M & Neumann, George R, 1979. "An Empirical Job-Search Model, with a Test of the Constant Reservation-Wage Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 87(1), pages 89-107, February.
    2. 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).
    3. Lancaster, Tony & Chesher, Andrew, 1983. "An Econometric Analysis of Reservation Wages," Econometrica, Econometric Society, vol. 51(6), pages 1661-1676, November.
    4. 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.
    5. Lancaster, Tony, 1985. "Simultaneous equations models in applied search theory," Journal of Econometrics, Elsevier, vol. 28(1), pages 113-126, April.
    6. Whitney K. Newey & James L. Powell & Francis Vella, 1999. "Nonparametric Estimation of Triangular Simultaneous Equations Models," Econometrica, Econometric Society, vol. 67(3), pages 565-604, May.
    7. Paolo Sestito & Eliana Viviano, 2011. "Reservation Wages: Explaining Some Puzzling Regional Patterns," LABOUR, CEIS, vol. 25(1), pages 63-88, March.
    8. Eswar S Prasad, 2003. "What Determines the Reservation Wages of Unemployed Workers? New Evidence From German Micro Data," IMF Working Papers 03/4, International Monetary Fund.
    9. Abraham, Katharine G & Farber, Henry S, 1987. "Job Duration, Seniority, and Earnings," American Economic Review, American Economic Association, vol. 77(3), pages 278-297, June.
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    Cited by:

    1. repec:spr:jlabre:v:38:y:2017:i:2:d:10.1007_s12122-017-9247-6 is not listed on IDEAS
    2. repec:nbp:nbpbik:v:47:y:2016:i:6:p:435-462 is not listed on IDEAS
    3. 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.
    4. 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.
    5. 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.

    More about this item

    JEL classification:

    • 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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