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A Contribution to the Empirics of Reservation Wages

Alan Krueger and Andreas Mueller

No 7957, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: 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.

Keywords: unemployment duration; unemployment; reservation wage; unemployment insurance (search for similar items in EconPapers)
JEL-codes: J30 J64 J65 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2014-02
New Economics Papers: this item is included in nep-lab
References: View complete reference list from CitEc
Citations: View citations in EconPapers (13) Track citations by RSS feed

Published in: American Economic Journal: Economic Policy, 2016, 8 (1), 142-179

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Related works:
Journal Article: A Contribution to the Empirics of Reservation Wages (2016) Downloads
Working Paper: A Contribution to the Empirics of Reservation Wages (2014) Downloads
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