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Reservation Wages, Labour Market Participation And Health

  • Sarah Brown

    ()

  • Jenny Roberts

    ()

  • Karl Taylor

    ()

    (Department of Economics, The University of Sheffield)

The concept of the reservation wage has played an important role in labour market theory; particularly in models of job search, labour supply and labour market participation. Despite this core theoretical role, there is a scarcity of empirical research which explores the setting of reservation wages at the individual level. In this paper, we focus on the determinants of reservation wages, with a particular focus on health, which has attracted very little attention despite its importance from a policy perspective. We use data for males from 14 waves of the British Household Panel Survey and estimate an endogenous switching model which predicts reservation wages for the unemployed and market wages for the employed. We employ methods to deal with the endogeneity of health, measurement errors in our self reported health variable and selection into economic activity. Our results suggest that health is an important determinant of selection, both into economic activity and into employment (versus unemployment) but that, once these participation effects are accounted for, health is not a significant determinant of either the reservation wage or the market wage. This casts doubt on the results of a number of previous studies that have failed to appropriately account for selection in models of male wages. Our results have important policy implications since they suggest that poor health is a major cause of economic inactivity.

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Paper provided by The University of Sheffield, Department of Economics in its series Working Papers with number 2008002.

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Length: 31 pages
Date of creation: Feb 2008
Date of revision: Feb 2008
Handle: RePEc:shf:wpaper:2008002
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  1. Garcia Perez, Jose Ignacio & Rebollo Sanz, Yolanda, 2005. "Wage changes through job mobility in Europe: A multinomial endogenous switching approach," Labour Economics, Elsevier, vol. 12(4), pages 531-555, August.
  2. Cristina Hernández Quevedo & Andrew M Jones & Ángel López Nicolás & Nigel Rice, 2005. "Socioeconomic inequalities in health: a comparative longitudinal analysis using the European Community Household Panel," Health, Econometrics and Data Group (HEDG) Working Papers 05/12, HEDG, c/o Department of Economics, University of York.
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  18. Robert Haveman & Mark Stone & Barbara Wolfe, 1989. "Market Work, Wages, and Men's Health," NBER Working Papers 3020, National Bureau of Economic Research, Inc.
  19. Lixin Cai & Guyonne Kalb, 2006. "Health status and labour force participation: evidence from Australia," Health Economics, John Wiley & Sons, Ltd., vol. 15(3), pages 241-261.
  20. Campolieti, Michele, 2002. "Disability and the labor force participation of older men in Canada," Labour Economics, Elsevier, vol. 9(3), pages 405-432, July.
  21. Blackaby, D.H. & Latreille, P.L. & Murphy, P.D. & O'Leary, N.C. & Sloane, P.J., 2007. "An analysis of reservation wages for the economically inactive," Economics Letters, Elsevier, vol. 97(1), pages 1-5, October.
  22. Michael Lokshin & Zurab Sajaia, 2004. "Maximum likelihood estimation of endogenous switching regression models," Stata Journal, StataCorp LP, vol. 4(3), pages 282-289, September.
  23. Grossman, Michael, 1972. "On the Concept of Health Capital and the Demand for Health," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 223-55, March-Apr.
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  25. John Bound, 1991. "Self-Reported Versus Objective Measures of Health in Retirement Models," Journal of Human Resources, University of Wisconsin Press, vol. 26(1), pages 106-138.
  26. Jones, Melanie K., 2006. "Is there employment discrimination against the disabled?," Economics Letters, Elsevier, vol. 92(1), pages 32-37, July.
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  28. Lindeboom, Maarten & van Doorslaer, Eddy, 2004. "Cut-Point Shift and Index Shift in Self-Reported Health," IZA Discussion Papers 1286, Institute for the Study of Labor (IZA).
  29. Lancaster, Tony & Chesher, Andrew, 1983. "An Econometric Analysis of Reservation Wages," Econometrica, Econometric Society, vol. 51(6), pages 1661-76, November.
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  31. Prasad, Eswar, 2003. "What Determines the Reservation Wages of Unemployed Workers? New Evidence from German Micro Data," IZA Discussion Papers 694, Institute for the Study of Labor (IZA).
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