Reservation Wages and the Wage Flexibility Puzzle

Using micro data for the UK and Germany, we provide novel evidence on the cyclical properties of reservation wages and estimate that wages and reservation wages are characterised by moderate and very similar degrees of cyclicality. Several job search models that quantitatively match the cyclicality...

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Bibliographic Details
Published in:The review of economics and statistics 2024-10, p.1-32
Main Authors: Koenig, Felix, Manning, Alan, Petrongolo, Barbara
Format: Article
Language:English
Online Access:Get full text
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Summary:Using micro data for the UK and Germany, we provide novel evidence on the cyclical properties of reservation wages and estimate that wages and reservation wages are characterised by moderate and very similar degrees of cyclicality. Several job search models that quantitatively match the cyclicality of wages tend to overpredict the cyclicality in reservation wages. We show that this puzzle can be addressed when reservation wages display backward-looking reference dependence. Model calibrations that allow for reference dependence match the empirically observed cyclicality of wages and reservation wages for plausible value of all other model parameters.
ISSN:0034-6535
1530-9142
DOI:10.1162/rest_a_01523