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Reservation Wages, Labour Market Participation And Health

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  • Sarah Brown

    ()

  • Jenny Roberts

    ()

  • Karl Taylor

    () (Department of Economics, The University of Sheffield)

Abstract

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.

Suggested Citation

  • Sarah Brown & Jenny Roberts & Karl Taylor, 2008. "Reservation Wages, Labour Market Participation And Health," Working Papers 2008002, The University of Sheffield, Department of Economics, revised Feb 2008.
  • Handle: RePEc:shf:wpaper:2008002
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    References listed on IDEAS

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    Cited by:

    1. Stephan Humpert & Christian Pfeifer, 2011. "Explaining Age and Gender Differences in Employment Rates: A Labor Supply Side Perspective," Working Paper Series in Economics 214, University of Lüneburg, Institute of Economics.
    2. Mark Stater & Jeffrey B Wenger, 2017. "The Immediate Hardship of Unemployment: Evidence from the US Unemployment Insurance System," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 43(1), pages 17-36, January.
    3. Kuhn, Michael & Prettner, Klaus, 2016. "Growth and welfare effects of health care in knowledge-based economies," Journal of Health Economics, Elsevier, vol. 46(C), pages 100-119.
    4. Brown, Sarah & Roberts, Jennifer & Taylor, Karl, 2011. "The gender reservation wage gap: Evidence from British Panel data," Economics Letters, Elsevier, vol. 113(1), pages 88-91, October.
    5. Alan S Duncan & Mark N Harris & Anthony Harris & Eugenio Zucchelli, 2013. "The Influence of Psychological Well-being, Ill Health and Health Shocks on Single Parents' Labour Supply," Bankwest Curtin Economics Centre Working Paper series WP1307, Bankwest Curtin Economics Centre (BCEC), Curtin Business School.
    6. Maik T. Schneider & Ralph Winkler, 2010. "Growth and Welfare under Endogenous Lifetime," CER-ETH Economics working paper series 10/137, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    7. Théophile Azomahou & Bity Diene & Mbaye Diene & Luc Soete, 2015. "Optimal health investment and preference structure," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(3), pages 521-565, November.
    8. Yolanda Pena-Boquete & Manuel Flores, 2013. "Earnings returns to education, experience and health: Evidence from EU-SILC," ERSA conference papers ersa13p1169, European Regional Science Association.
    9. repec:oup:oxecpp:v:69:y:2017:i:3:p:734-757. is not listed on IDEAS
    10. Manuel Flores & Adriaan Kalwij, 2013. "What do wages add to the health-employment nexus? Evidence from older European workers," Documentos de trabajo - Analise Economica 0054, IDEGA - Instituto Universitario de Estudios e Desenvolvemento de Galicia.
    11. Brown, Sarah & Taylor, Karl, 2014. "Household finances and the ‘Big Five’ personality traits," Journal of Economic Psychology, Elsevier, vol. 45(C), pages 197-212.
    12. 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.
    13. Owen O'Donnell & Eddy Van Doorslaer & Tom Van Ourti, 2013. "Health and Inequality," Tinbergen Institute Discussion Papers 13-170/V, Tinbergen Institute.
    14. Marco Caliendo & Robert Mahlstedt & Oscar A. Mitnik, 2014. "Unobservable, but Unimportant?: The Influence of Personality Traits (and Other Usually Unobserved Variables) for the Evaluation of Labor Market Policies," Discussion Papers of DIW Berlin 1407, DIW Berlin, German Institute for Economic Research.
    15. Zucchelli, E. & Harris, M. & Zhao, X., 2012. "Ill-health and transitions to part-time work and self-employment among older workers," Health, Econometrics and Data Group (HEDG) Working Papers 12/04, HEDG, c/o Department of Economics, University of York.
    16. Jennifer Roberts & Karl Taylor, 2017. "Intra-household commuting choices and local labour markets," Oxford Economic Papers, Oxford University Press, vol. 69(3), pages 734-757.
    17. repec:eee:jeborg:v:136:y:2017:i:c:p:161-173 is not listed on IDEAS
    18. 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.
    19. Caliendo, Marco & Mahlstedt, Robert & Mitnik, Oscar, 2014. "Unobservable, but Unimportant? The Influence of Personality Traits (and Other Usually Unobserved Variables) for the Estimation of Treatment Effects," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100502, Verein für Socialpolitik / German Economic Association.
    20. Harris, M.N. & Zhao, X. & Zucchelli, E., 2016. "The dynamics of health and labour market transitions at older ages: evidence from a multi-state model," Health, Econometrics and Data Group (HEDG) Working Papers 16/30, HEDG, c/o Department of Economics, University of York.
    21. Castro, Alyssa Mae & Deluna, Roperto Jr, 2013. "Factors Affecting Call Center as a Job Preference among Employees in Davao City," MPRA Paper 51678, University Library of Munich, Germany.

    More about this item

    Keywords

    Endogenous switching models; Health status; Labour market participation; Reservation wages;

    JEL classification:

    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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