thumb|Reservation Wage Example

In labor economics, the reservation wage is the lowest wage rate at which a worker would be willing to accept a particular type of job. This wage is a theoretical representation of the hourly rate at which an individual values their own leisure time. A job offer involving the same type of work and the same working conditions, but at a lower wage rate, would be rejected by the worker. In this case, based on the reservation wage theory, the individual would be better off not working as they value their leisure at a higher rate than the wage they would receive for working. This same study also found out that people who have not been employed before had higher reservation wages than those who had. This finding could be explained by the fact they do not understand their realistic value in the labor market.

There have been many studies on the effect of unemployment duration and benefits on the reservation wages of individuals. With regard to unemployment benefits, as these increase so does the reservation wage; because their non-labor benefits are higher, they place greater value on their leisure time. Therefore, it makes sense that changes in unemployment benefits have a positive correlation with reservation wages. With regard to the effect of unemployment duration on reservation wages it has mostly been found that "reservation wages decline at a modest rate over the unemployment spell."

It is important to remember that reservation wage is not the only value placed on a job. Individuals may place value on non-wage characteristics, such as the ability to work from home or flexible working hours.

Just as a worker has an incentive to search for a high wage when looking for a job, a consumer has an incentive to search for a low price when purchasing a good. The highest price the consumer is willing to pay for a particular product is that consumer's reservation price.

See also

  • Labor economics
  • Optimal stopping
  • Price dispersion
  • Real options analysis
  • Search theory
  • Job hunting

References

  • The IAB info platform Reservation wages of the unemployed of the Institute for Employment Research, Nuremberg, Germany, presents scientific findings on "reservation wages".