Reservation Wages

Background

In the economics literature, the term "reservation wage" has been used with two different meanings. In the job search literature, the term refers to the lowest wage a person would accept if the person has to pay a positive sum to gain another job offer from a wage distribution (Mortensen 1986). In the labor supply literature (Killingsworth 1983), it has been used as the lowest wage at which a person will work, which has also been referred to as the "asking wage." In this article, the reservation wage is not used within the context of the job search literature given that most DI beneficiaries do not search for jobs (Hennessey and Muller 1994). Instead, the reservation wage is used in the same sense as that of the labor supply literature, as detailed below.

In the standard labor leisure choice model of the labor supply literature, individuals,,,