A Contribution to the Empirics of Reservation Wages

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu 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. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E SJEL Classification: J30, J64, J65

The Effect of Unemployment Benefits and Nonemployment Durations on Wages

“…Following our approach, Lalive, Landais, and Zweimüller (2015) also find that the path of reemployment wages does not respond to increases in UI durations in Austria. In contrast, Krueger and Mueller (2014) find that jobs with wages above the self-reported reservation wage are more likely to be accepted, although a substantial fraction of jobs paying below the reservation wage are accepted as well. However, they also find that reservation wages neither change significantly throughout the nonemployment spell within individuals, nor do they respond to UI exhaustion.…”

“…This is in a similar spirit as Hornstein, Krusell, and Violante (2011), who infer about reservation wages using data on worker flows, and who find, consistent with our results, that in a broad range of search models unemployed workers' must place a low value on their outside option. 5 The best evidence on reported reservation wages comes from Krueger and Mueller (2014), who find that while reservation wages appear to influence employment decisions among UI recipients in New Jersey, they are neither affected by unemployment duration nor by UI duration. Hence, as in our setting, changes in reservation wages are unlikely to be responsible for reductions in reemployment wages over the unemployment spell.…”

Older Americans Would Work Longer if Jobs Were Flexible

“…Feldstein and Poterba (1984),Holzer (1986), andKrueger and Mueller (2016) use a similar survey approach to elicit the reservation wages of unemployed workers.• Starting at the reference salary, imagine that earnings for Option A were to decline (increase).What earnings level for Option A would be just low (high) enough that you would switch to Option B (Option A)?…”

Job Search under Debt: Aggregate Implications of Student Loans

“…Chetty (2008) finds that the liquidity effect accounts for 60% of the impact of UI. Krueger and Mueller (2016) find that severance payments and savings tend to be positively associated with the workers' reservation wages. The mechanism is also related to several other papers that shed light on job search problems (Bloemen and Stancanelli, 2001;Algan et al, 2003;Lentz and Tranas, 2005;Silvio, 2006;Browning, Crossley and Smith, 2007;Kaplan, 2012;Herkenhoff, 2015;Herkenhoff and Ohanian, 2015;Herkenhoff, Phillips and Cohen-Cole, 2016).…”