Factors influencing the reservation wage of unemployed workers in the South Otago region

Abstract

This paper examines the major factors expected to influence the reservation wage setting behaviour of unemployed workers. The hypotheses examined in this thesis are: 1. That income earned in the underground economy leads to an increase in the reservation wages of the unemployed; and 2. That the unemployment benefit also increases the reservation wage of the unemployed.

Data are obtained through conducting standardised interviews on willing unemployed workers. These interviews took place in the South Otago area from June 18 to June 29, 1990. The main results suggest that income earned in the underground economy increases the reservation wages of the unemployed who obtain income from this source; age has a significant positive influence on the reservation wage; and the previous market wage of the unemployed worker significantly increases the worker's reservation wage. The effect of benefit income and search costs is not significantly different from zero. Under the assumption of a normally distributed job offer function, searchers who have income from the underground economy, are older, or had a better paid previous job have a higher reservation wage.