Reservation Wage Escalation
RCTReview
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.
Picture this
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.
What the evidence says
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.
- Who was studied
- Low-income public works participants in Tunisia tracked over a 5-year post-program window.
- How
- Longitudinal randomized controlled trial measuring individual employment participation and earnings 5 years after program completion.
What to do
Align temporary public works wage rates closely with local private market floor rates near program conclusion to prevent workers from developing unviable wage expectations.
From the source
"In an infrastructure-focused PWP in Tunisia, for example, participants experienced a five percentage point decline in the probability of engaging in any income-generating activity compared to nonparticipants five years after program completion."
Public works programs and labor market outcomes.pdf