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Reservation Wages, Expected Wages and the Duration of Unemployment: Evidence from British Panel Data

Sarah Brown () and Karl Taylor ()

No 3981, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: In this paper we analyse the role of wage expectations in an empirical model of incomplete spells of unemployment and reservation wages. To be specific, we model the duration of unemployment, reservation wages and expected wages simultaneously for a sample of individuals who are not in work, where wage expectations are identified via an exogenous policy shock based upon the introduction of Working Family Tax Credits (WFTC) in the UK. The results from the empirical analysis, which is based on the British Household Panel Survey, suggest that WFTC eligibility served to increase expected wages and that expected wages are positively associated with reservation wages. In addition, incorporating wage expectations into the econometric framework was found to influence the magnitude of the key elasticities: namely the elasticity of unemployment duration with respect to the reservation wage and the elasticity of the reservation wage with respect to unemployment duration.

Keywords: unemployment duration; reservation wages; expected wages (search for similar items in EconPapers)
JEL-codes: J13 J24 J64 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2009-01
New Economics Papers: this item is included in nep-lab
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Citations: View citations in EconPapers (8) Track citations by RSS feed

Published in: Economics Letters, 2013, 119 (3), 276-279

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