• Karen Williams

Why Are Job Seekers Sitting out of the Labor Market? Thank Reservation Wage.


Are you familiar with the term “reservation wage”? The terminology of “reservation wage” was new to us as well.


Reservation wage is related to why potential job seekers may be sitting out of the labor market.


Reservation wage is the lowest wage rate at which a worker would be willing to accept a job. This wage is a theoretical representation of the hourly rate at which individuals value their own leisure time or their current lifestyle. The determination of reservation wage depends on the individual and the given job, and it can make up an important component of the job market.


We have many discussions with employers who are trying to fill open positions. One retail employer we talked with recently stated: “You wouldn’t believe what salary some of the people we are interviewing are asking for. One applicant asked for $60.00 an hour and only wanted to work 10 hours a week.”


This may seem ridiculous, but so is the current job market.


There are several factors that determine an individual’s “reservation wage”. The relationship between reservation wages and unemployment has been studied and analyzed against the economic impact on the labor market.


Studies have shown that in a job market like the one we are currently experiencing, a job offer involving the same type of work and the same working conditions, but at a lower wage rate, would be rejected by a worker. A worker with a high school diploma will usually have a lower reservation wage than young university graduates. For instance, the reservation wage of a skilled professional, such as an engineer, is considerably higher than that of an unskilled worker.


We’ve also had numerous discussions with laid off employees in the past who rejected jobs because the salary was “a pay cut.” From our point of view, their salary was zero since they didn’t have a job, but that’s not how the laid off employees looked at it. They still viewed their previous salary as part of their identity and their base for what they could consider possible.


We also know that after being unemployed for twelve months, the participants’ reservation wage may be lower than it was at the beginning of their unemployment period.


Recently we met with another retail employer who said: “We are not getting any job applicants”. The manager told us they would be flexible with the work hours. The store is currently open from 10:00 a.m. to 6:00 p.m. and would accept full-time or part-time workers.


She said they offer good benefits including a 401k. She was clearly frustrated because the current staff is tired and beginning to feel overworked due to reduced staffing. This employer has multiple locations and stated that the other locations are receiving applications because the perception is that the other locations are more desirable. Many variables, like location and travel time, can impact how job seekers view hiring opportunities and their perception of what their wage should be.


There are many factors which impact an individual’s willingness to accept work. Here's a visual explanation of reservation wage.


Graphic via marketbusinessnews.com.

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