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RESERVATION WAGES, LABOUR MARKET PARTICIPATION AND HEALTH

Sarah Brown (), Jennifer Roberts and Karl Taylor ()

No 2008002, Working Papers from The University of Sheffield, Department of Economics

Abstract: The concept of the reservation wage has played an important role in labour market theory; particularly in models of job search, labour supply and labour market participation. Despite this core theoretical role, there is a scarcity of empirical research which explores the setting of reservation wages at the individual level. In this paper, we focus on the determinants of reservation wages, with a particular focus on health, which has attracted very little attention despite its importance from a policy perspective. We use data for males from 14 waves of the British Household Panel Survey and estimate an endogenous switching model which predicts reservation wages for the unemployed and market wages for the employed. We employ methods to deal with the endogeneity of health, measurement errors in our self reported health variable and selection into economic activity. Our results suggest that health is an important determinant of selection, both into economic activity and into employment (versus unemployment) but that, once these participation effects are accounted for, health is not a significant determinant of either the reservation wage or the market wage. This casts doubt on the results of a number of previous studies that have failed to appropriately account for selection in models of male wages. Our results have important policy implications since they suggest that poor health is a major cause of economic inactivity.

Keywords: Endogenous switching models; Health status; Labour market participation; Reservation wages (search for similar items in EconPapers)
JEL-codes: J13 J24 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2008-02, Revised 2008-02
New Economics Papers: this item is included in nep-hea and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

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Journal Article: Reservation wages, labour market participation and health (2010) Downloads
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