Reservation wage

Reservation wage

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. 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.

An individual's reservation wage may change over time depending on a number of factors, like changes in the individual's overall wealth, changes in marital status or living arrangements, length of unemployment, and health and disability issues. An individual might also set a higher reservation wage when considering an offer of an unpleasant or undesirable job than when considering a type of job the individual likes (see compensating differential).

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.

Example:

A worker was recently laid off from her job making 10 dollars per hour. She began receiving unemployment benefits roughly equal to her former salary. During her job search she was offered numerous jobs paying in the range of 6 to 8 dollars per hour. Though she wished to work, she turned these jobs down because she chose a reservation wage of 10 dollars per hour. This choice of reservation wage might be explained by "at least" two elements: (1) her previous job paid her 10 dollars per hour, and (2) her unemployment benefits were greater than the salaries offered.

Her reservation wage would not necessarily remain at 10 dollars per hour. If her unemployment benefits run out and she endures several months of unsuccessful search, she may be induced to adjust her reservation wage and take a job which pays less than her previous one. On the other hand, if she wins the lottery or inherits a large sum of money, her reservation wage may jump up to the point where even job offers at double her former salary would not meet her requirements.

ee also

*Search theory
*Job hunting
*List of economics topics


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