Reservation wages, market wages and unemployment: Analysis of individual level panel data

Using individual level panel data, we analyse the divergence between the reservation wages of individuals who are out of work and their predicted market wages, focusing upon identifying the factors that influence the potential divergence. In addition, using propensity score matching techniques, we explore the implications of such divergences for future employment and wages. Our findings suggest that having reservation wages that are high relative to the predicted market wage influence both future employment and future wages.

Research highlights► Individual level data about reservation wages for those currently not in employment. ► Investigate how realistic reservation wages are in comparison to the market wage. ► Explore how deviations from the market wage influence future likelihood of employment.