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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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  2. Blackaby, David H. & Latreille, Paul L. & Murphy, Philip D. & O'Leary, Nigel C. & Sloane, Peter J., 2006. "An Analysis of Reservation Wages for the Economically Inactive," IZA Discussion Papers 1980, Institute for the Study of Labor (IZA).
  3. Nigel Rice & Jennifer Roberts & Andrew M. Jones, 2007. "Sick of work or too sick to work? Evidence on health shocks and early retirement from the BHPS," Working Papers 2007002, The University of Sheffield, Department of Economics, revised Jan 2007.
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