Reservation Wage Escalation

In Simple Words

If a worker gets a temporary government job paying twenty dollars an hour for six months, the worker becomes accustomed to that higher wage. When the government project ends, the worker refuses local private jobs paying twelve dollars an hour, remaining unemployed longer than if the temporary job had never existed.

Research question

Temporary government employment programs aim to bridge short-term income gaps but can inadvertently harm long-term employment prospects after project conclusion. If participants raise their minimum acceptable wage during the program, they may subsequently reject viable private sector job opportunities.

Participants

Low-income public works participants in Tunisia tracked over a 5-year post-program window.

Study Design

Longitudinal randomized controlled trial measuring individual employment participation and earnings 5 years after program completion.

Results

Five years post-program completion, public works participants experienced a 5 percentage point decline in the probability of engaging in any income-generating activity compared to non-participants, driven by elevated wage expectations and missed private sector opportunities.

Takeaway

Align temporary public works wage rates closely with local private market floor rates near program conclusion to prevent workers from developing unviable wage expectations.

Read alongside the research

Plain-English glossary

Original explanations, informed by the references below. Examples are illustrations, not data from the studies above. The research text stays unchanged.

Longitudinal study

A study that checks the same group of people at different times. This lets researchers examine how things change over time.

ExampleResearchers ask the same workers about their wellbeing at the start, after three months and after six months.

NICE · Longitudinal study ↗Read more about longitudinal study →

Percentage points

The difference between two percentages.

ExampleA rise from 40% to 50% is 10 percentage points. Relative to the starting value, that is a 25% increase.

Office for National Statistics · Percentages ↗Read more about percentage points →

Randomized controlled trial

A study that uses chance, like drawing lots, to decide who receives each option being compared. Researchers compare the groups’ outcomes to estimate the effect of those options.

ExampleA lottery assigns volunteers to a training programme or a comparison group. Researchers then compare their outcomes.

GET-IT glossary · Randomized study ↗Read more about randomized controlled trial →

Related findings

• Gender-Differentiated Employment Gains →Labour & employment

  Think of a community gym that only offers heavy weightlifting equipment, which mostly attracts young men. If the gym adds cardio machinery and offers specific time slots for women, a whole new group of people starts exercising, driving up the total overall attendance of the facility.

• General Equilibrium Wage Spillovers →Labour & employment

  Imagine a small town where a single large factory hires almost everyone at low wages because workers have no alternative options. If the government opens a massive construction project next door offering higher pay, the factory owner is forced to raise wages to prevent workers from quitting.

• Heterogeneous Impact Disparity →Labour & employment

  Imagine giving free bus passes to two people: one who already owns a car and one who has no transportation at all. The car owner barely uses the bus pass and sees little change in daily life, while the person without a car uses it every day to get a job, experiencing a massive life improvement.

• Marginal Value of Non-Work Time (MVT) →Labour & employment

  Think of an individual's weekly hours as a battery that depletes progressively as work hours increase; trading away the first few hours of leisure costs very little, but trading away leisure time when already working full-time requires a substantially higher financial payout to compensate.