Reservation Wage Inelasticity to Experience

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In Simple Words

Imagine working a short gig that pays well and then refusing to accept any future job unless it pays at least that same high rate. If workers raise their minimum price tag, they spend much more time unemployed holding out for premium offers. If their minimum acceptable pay stays unchanged, they continue accepting available jobs at prevailing rates while leveraging new contacts.

Young male job applicants in Malawi

Without short work experience
Reference minimum-pay expectation
With short work experience
USD124.40 more per month estimated

Eight-month instrumental-variable estimate of stated monthly reservation pay; not statistically significant. The uncertain estimate does not rule out wage-expectation changes.

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Research question

Gaining short-term work experience and earning higher wages could induce workers to upwardly adjust their minimum acceptable wage (reservation wage), leading to longer search durations and altered job match quality. Testing whether short-term work shifts reservation wages determines whether supply-side expectations explain post-program wage growth.

Participants

N = 221 urban male youth job seekers completing reservation wage modules in Lilongwe, Malawi.

Study Design

Instrumental Variable (IV) estimation evaluating self-reported monthly reservation wages and active job search proportions over an 8-month post-intervention period.

Results

Short-term work experience produced a statistically non-significant effect on monthly reservation wages (IV estimate = +$124.40, p > 0.10) and no significant increase in active job search duration (IV estimate = +0.089, p > 0.10), ruling out reservation wage shifts as the mechanism driving daily wage returns.

Takeaway

Test reservation wage dynamics alongside job search intensity to rule out worker supply-side expectation shifts as the primary cause of wage growth.

Source and citation

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