A Contribution to the Empirics of Reservation Wages

By Alan B. Krueger, Andreas I. Mueller. Social Science Research Network, 2016

180 citations recorded by the source corpus.

This paper provides evidence on the behavior of reservation wages over the spell of unemployment using high‐frequency longitudinal data. Using data from our survey of unemployed workers in New Jersey, where workers were interviewed each week for up to 24 weeks, we find that self‐reported reservation wages decline at a modest rate over the spell of unemployment, with point estimates ranging from 0.05 to 0.14 percent per week of unemployment. The decline in reservation wages is driven primarily by older individuals and those with personal savings at the start of the survey. The longitudinal nature of the data also allows us to test the relationship between job acceptance and the reservation wage and offered wage, where the reservation wage is measured from a previous interview to avoid bias due to cognitive dissonance. Job offers are more likely to be accepted if the offered wage exceeds the reservation wage, and the reservation wage has more predictive power in this regard than the pre‐displacement wage, suggesting the reservation wage contains useful information about workers' future decisions. In addition, there is a discrete rise in job acceptance when the offered wage exceeds the reservation wage. In comparison to a calibrated job search model, the reservation wage starts out too high and declines too slowly, on average, suggesting that many workers persistently misjudge their prospects or anchor their reservation wage on their previous wage.

Subfields: Economics and Econometrics, General Health Professions

View Paper: https://www.semanticscholar.org/paper/c75312f78d17df299f42b5311f7afc9510af8c12

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Citations in the corpus

The Cyclicality of the Opportunity Cost of Employment (2016, methodology): “Estimates of the increase in reservation wages when UI benefits increase range from zero (Krueger and Mueller, 2013) to as large as 0.42 (Feldstein and Poterba, 1984).”
Quantifying the Lasting Harm to the US Economy from the Financial Crisis (2015, background): “For a discussion along these lines with cites to that literature, see Hall (2013).”
Social Experiments in the Labor Market (2016, unknown): “14 The NSWD has been examined by an extensive literature, including Lalonde (1986), Dehejia and Wahba (2002), and Smith and Todd (2005).”