The Reservation Wage Unemployment Duration Nexus

11 Pages Posted: 26 Jul 2010

See all articles by John T. Addison

John T. Addison

University of South Carolina - Moore School of Business - Department of Economics; IZA Institute of Labor Economics

José A. F. Machado

New University of Lisbon

Pedro Portugal

Bank of Portugal - Research Department; New University of Lisbon; IZA Institute of Labor Economics

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Abstract

A thorny problem in identifying the determinants of reservation wages and particularly the role of continued joblessness in their evolution is the simultaneity issue. We deploy a natural control function approach to the problem that involves conditioning elapsed duration on completed unemployment duration in the reservation wage equation. Our analysis confirms that the use of elapsed duration alone compounds two separate and opposing influences. Only with the inclusion of completed duration is the negative effect of continued joblessness on reservation wages apparent. For its part, the completed duration coefficient suggests that higher reservation wages negatively influence the probability of exiting unemployment.

Keywords: reservation wages, unemployment duration, control function

JEL Classification: J64, J65

Suggested Citation

Addison, John T. and Machado, José A. F. and Portugal, Pedro, The Reservation Wage Unemployment Duration Nexus. IZA Discussion Paper No. 5077. Available at SSRN: https://ssrn.com/abstract=1648362

John T. Addison (Contact Author)

University of South Carolina - Moore School of Business - Department of Economics ( email )

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IZA Institute of Labor Economics

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

José A. F. Machado

New University of Lisbon

Lisbon, 1099-085
Portugal

Pedro Portugal

Bank of Portugal - Research Department ( email )

Av. Almirante Reis 71, 6th
Lisbon 1150-012
Portugal
+351 21 313 0000 (Phone)
+351 21 814 3841 (Fax)

New University of Lisbon

Lisbon, 1099-085
Portugal

IZA Institute of Labor Economics

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

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