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

33 Pages Posted: 2 Mar 2009

See all articles by Sarah Brown

Sarah Brown

University of Sheffield - Department of Economics; IZA Institute of Labor Economics

Karl Taylor

University of Sheffield - Department of Economics

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

JEL Classification: J13, J24, J64

Suggested Citation

Brown, Sarah and Taylor, Karl B., Reservation Wages, Expected Wages and the Duration of Unemployment: Evidence from British Panel Data. IZA Discussion Paper No. 3981. Available at SSRN: https://ssrn.com/abstract=1351145

Sarah Brown

University of Sheffield - Department of Economics

9 Mappin Street
Sheffield, S1 4DT
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Karl B. Taylor

University of Sheffield - Department of Economics ( email )

9 Mappin Street
Sheffield, S1 4DT
United Kingdom

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