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The estimation of reservation wages: A simulation-based comparison

  • Leppin, Julian Sebastian

This paper examines the predictive power of different estimation approaches for reservation wages. It applies stochastic frontier models for employed workers and the approach from Kiefer and Neumann (1979b) for unemployed workers. Furthermore, the question of whether or not reservation wages decrease over the unemployment period is addressed. This is done by a pseudo-panel with known reservation wages which uses data from the German Socio-Economic Panel as a basis. The comparison of the estimators is carried out by a Monte Carlo simulation. The best results are achieved by the cross-sectional stochastic frontier model. The Kiefer-Neumann approach failed to predict the decreasing reservation wages correctly.

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Paper provided by Hamburg Institute of International Economics (HWWI) in its series HWWI Research Papers with number 124.

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Date of creation: 2012
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Handle: RePEc:zbw:hwwirp:124
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  1. McCall, John J, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, MIT Press, vol. 84(1), pages 113-26, February.
  2. Uwe Jensen, 2005. "Misspecification Preferred: The Sensitivity of Inefficiency Rankings," Journal of Productivity Analysis, Springer, vol. 23(2), pages 223-244, 05.
  3. Sholeh A. Maani & A. H. Studenmund, 1986. "The critical wage, unemployment duration, and wage expectations: The case of Chile," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 39(2), pages 264-276, January.
  4. Duncan Watson & Robert Webb, 2008. "Reservation wage levels in UK and German financial services sectors," The Service Industries Journal, Taylor & Francis Journals, vol. 28(8), pages 1167-1182, October.
  5. Michael W. L. Elsby & Bart Hobijn & Ayşegül Şahin, 2013. "Unemployment Dynamics in the OECD," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 530-548, May.
  6. Ronald Bachmann, 2005. "Labour Market Dynamics in Germany: Hirings, Separations, and Job-to-Job Transitions over the Business Cycle," SFB 649 Discussion Papers SFB649DP2005-045, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  7. Robert Webb & Duncan Watson & Tim Hinks, 2003. "Testing for Wage Overpayment in UK Financial Services: A Stochastic Frontier Approach," The Service Industries Journal, Taylor & Francis Journals, vol. 23(5), pages 123-136, November.
  8. Greene, William, 2005. "Reconsidering heterogeneity in panel data estimators of the stochastic frontier model," Journal of Econometrics, Elsevier, vol. 126(2), pages 269-303, June.
  9. John T. Addison & José A. F. Machado & Pedro Portugal, 2013. "The Reservation Wage Unemployment Duration Nexus," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(6), pages 980-987, December.
  10. John T. Addison & Mário Centeno & Pedro Portugal, 2008. "Do Reservation Wages Really Decline? Some International Evidence on the Determinants of Reservation Wages," Working Papers w200802, Banco de Portugal, Economics and Research Department.
  11. Battese, George E. & Coelli, Tim J. & Colby, T.C., 1989. "Estimation of Frontier Production Functions and the Efficiencies of Indian Farms Using Panel Data from ICRISAT's Village Level Studies," 1989 Conference (33rd), February 7-9, 1989, Christchurch, New Zealand 144383, Australian Agricultural and Resource Economics Society.
  12. KIEFER, Nicholas M. & NEUMANN, George R., . "An empirical job-search model, with a test of the constant reservation-wage hypothesis," CORE Discussion Papers RP -358, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  13. Devine, Theresa J. & Kiefer, Nicolas M., 1991. "Empirical Labor Economics: The Search Approach," OUP Catalogue, Oxford University Press, number 9780195059366, March.
  14. RITTER, Christian & SIMAR, Leopold, 1994. "Pitfalls of Normal-Gamma Stochastic Frontier Models," CORE Discussion Papers 1994041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  15. Gert G. Wagner & Joachim R. Frick & Jürgen Schupp, 2007. "The German Socio-Economic Panel Study (SOEP) – Scope, Evolution and Enhancements," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 127(1), pages 139-169.
  16. William Greene, 2002. "Fixed and Random Effects in Stochastic Frontier Models," Working Papers 02-16, New York University, Leonard N. Stern School of Business, Department of Economics.
  17. repec:cup:cbooks:9780521666633 is not listed on IDEAS
  18. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  19. Meeusen, Wim & van den Broeck, Julien, 1977. "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 435-44, June.
  20. Eswar Prasad, 2003. "What Determines the Reservation Wages of Unemployed Workers? New Evidence From German Micro Data," IMF Working Papers 03/4, International Monetary Fund.
  21. Battese, George E. & Coelli, Tim J., 1988. "Prediction of firm-level technical efficiencies with a generalized frontier production function and panel data," Journal of Econometrics, Elsevier, vol. 38(3), pages 387-399, July.
  22. Christina Boll, 2010. "Lohneinbußen von Frauen durch geburtsbedingte Erwerbsunterbrechungen," Wirtschaftsdienst, Springer, vol. 90(10), pages 700-702, October.
  23. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
  24. 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).
  25. Kate Antonovics & Robert Town, 2004. "Are All the Good Men Married? Uncovering the Sources of the Marital Wage Premium," American Economic Review, American Economic Association, vol. 94(2), pages 317-321, May.
  26. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
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