Reservation wage

Reservation wage is a term of microeconomics, derived from the English word " reservation wage", but also called reservation wage. It refers to the wages of labor, to which an employee is still just ready to offer his labor power. If the wage below the reservation wage, so the individual does not provide more manpower.

The basic idea

The idea behind the reservation wage is that leisure for the worker is an economic good and the employee weighs a balance between those goods that he could acquire for the reward, and the free time that he has to sacrifice for wage labor.

In a wage equal to the reservation wage of the worker is indifferent between starting work and of leisure. An energy absorption is therefore greater than / equal to expect the reservation wage only one wage offer.

The reservation wage is to be regarded as a special case of the reservation price.

Market wage rate and reservation wage

The decision of the individual, how much work it offers, or even whether it offers work is illustrated by the following comparison between the market wage rate and reservation wage.

The market wage rate is exogenously determined here and includes education, work experience and the regional and occupational labor market situation; these are summarized in the row vector. The individual is defined by and is the column vector of the coefficients of the influence of the individual to reflect. Consequently, the market wage rate can be named:

It is assumed that the individual use his time maximum spread. It sells its time in the labor market or consumed themselves as leisure, housework, child rearing and education.

Thus, the individual each of these two time distributions assigns a specific value to, for the time at work that is the market wage rate and for the non-working hours are the opportunity costs of labor, that is to say, the value of the benefits of this time, z. B. leisure.

The individual then compares the value of an hour of labor to the value of non-work hours and decide whether it is working at all or working an extra hour, so it will only do so if the market wage rate is higher than the value of non-working time.

Consequently, the reservation wage is now from the amount of the value of non-working hours, from there it is not worth more or work at all to go, that is, at what wage level provides the individual his work on and therefore waives his spare time. This allows line with the market wage rate of the reservation wage as naming follows:

The condition that the individual then provides work is:

Or is it still the individual hours of work with defined, results in the following decision problems:

• For, that is, the individual does not provide working hour when the market wage rate is less than or equal also corresponds to the reservation wage rate.

• For, that is, the individual presents its time for work to available if the market wage rate is greater than the reservation wage.

The graph in the right image shows how the hourly wage varies with the working hours of a worker. The worker begins only when the reservation wage at all to work on and at the 80th hour worked, the hourly wage increases tremendously, which means that it is the work force does not matter how much they would get for another hour to wage; it represents the work of one from the 80th hour.

Reservation wage and unemployment

An increase in the safety of unemployment ( unemployment better, the risk of unemployment decreases) increases the reservation wage, ie the minimum wage for a worker would be willing to work. Increases the risk of unemployment (ALG is reduced ), then the employee is more and more willing to work for less pay, because the best alternative, the lower unemployment benefits, is less attractive.

For older job seekers the reservation wage falls with increasing search time, because the workplace supplier firms may be less and less, the acquisition phase is shorter and the risk decreases. Thus, even long -term unemployed have a lower reservation wage than other job seekers. Still find this hard labor; which may either be due to decreasing search intensity or based on the loss of human capital.

Until now, only the job was considered, now the view of the employer is directed. This has two criteria for the search for workers: - the search for suitable workers - the selection process to determine the most productive workers

The search steps are also here, as with the job seeker, limited by search costs. Due to vacancies and the selection process time also opportunity costs are incurred in the form of lost profits. For job seekers it was the reservation wage, with employers, it is a minimum qualification that is required. The employer then has a job to an applicant if their qualifications are higher than the required minimum qualifications.

Example

The company " Mineral GmbH" need for recovery of mineral water a person for the pump house. There sign up for this site 2 candidates: Olli and Lutz. Olli, very qualified man would work for € 20 / hour, below that amount he would devote only his hobby. Lutz is an incompetent guy, he would work for from 4 € / hour.

Consequently, the reservation wage is at Olli € 20 / hour and at Lutz € 4 / hour, is the beginning of their individual labor supply curve.

What shall pay the contractor?

In the cost minimization GmbH would specify 4 € / hour and adjust Lutz, because Olli is not for the reward available.

If the limited liability company but now the high qualification of both candidates know without being able to assign them to a at the two men. The LLC can now offer a wage rate of 20 € / hour and Olli and Lutz would apply, the GmbH now has a 50% chance to get the Qualifying Teren at a random selection. At a lower wage rate, the GmbH would get 100 % of the incompetent.

This example shows that when a surplus of applicants, a company is trying to reduce their wage rate, but that it signals a negative change in quality of workers or applicants. Another disadvantage is that an incomplete flow of information about productivity and the reservation wage labor is. A company knows only the distribution of productivity, she knows that the reservation wage varies positively with the performance of the individual applicant.