Reservation wage

Abstract: This paper investigates a general equilibrium model of unemployment and the business cycle in which specialization of labor plays a key role. A rational expectations equilibrium with fully flexible wages and prices can exhibit unemployment in which the marginal product of employed workers exceeds the reservation wage of those who are without jobs. Workers are unemployed either because they are in the process of relocating for a better job or because they are waiting for conditions in the depressed sector to improve. Moreover, seemingly small disruptions in the supplies of primary commodities such as energy could be the source of fluctuations in aggregate employment and can exert surprisingly large effects on real output.

Abstract: This paper presents a simple model to evaluate alternative payment schemes for tax inspectors in the presence of corruption. We consider problems of both moral hazard, which arises because taking bribes cannot be observed without costly monitoring, and adverse selection, since not all potential tax inspectors can be identified as being honest or dishonest. We identify three wage regimes. First, one could pay the same wage that a tax inspector could earn elsewhere - his reservation wage. Second, one could pay a wage which solves the moral hazard problem, i.e. deters bribery. This we call an efficiency wage, by analogy with recent models examined i n macro economics. Third, the government could pay a wage below the reservation wage, at which only the dishonest become tax inspectors - the capitulation wage. We make precise the conditions under which each yields the greatest amount o f tax revenues, net o f administrative costs. Many countries in the developing world are undergoing structural adjustment programmes which require fundamental fiscal changes. Outside agencies advise restoration of budget balance, a task which involves expenditure cuts and tax increases. The treatment of public employee pay scales often poses a particular dilemma i n this process. Wages and salaries are a significant component of government expenditures and one important question concerns the extent to which wages rather than employment cuts should be used to save money. There is sometimes a reluctance to advocate wage cuts, stemming in part from a feeling that this might impair the performance of the public sector. Hence, Tanzi (1990) argues that a policy of wage cutting ' is likely to increase the inefficiency of public sector employees, especially at a time when the public sector is expected to play a larger role in restructuring the economy' (p. 16). In the context of tax collection the issue is particularly pressing, given the need to raise more tax revenues. A reduction in efficiency in this branch of the government i s likely t o mean that fewer returns are processed and when individuals' living standards are squeezed, their incentive to accept bribes in lieu o f collecting taxes i s increased.^ O n this count, i t i s even sometimes suggested that wages of tax inspectors should be increased to aid the effort to * The comments of Henry Bienen, John Hey and two anonymous referees have been helpful in revising this paper. The authors are also grateful t o the John M . Olin Program for the Study o f Economic Organization and Public Policy at Princeton University and the Pew Charitable Trusts for financial support. McLaren also acknowledges support from the International Finance Section of Princeton University. None of the above should be implicated in any way. ' See, for example, Goode (1984) chapter 1 3 and Gould and Amaro-Reyes (1983).

Abstract: We present a model of workers supplying labor to paid crowdsourcing projects We also introduce a novel method for estimating a worker's reservation wage - the key parameter in our labor supply model We tested our model by presenting experimental subjects with real-effort work scenarios that varied in the offered payment and difficulty As predicted, subjects worked less when the pay was lower However, they did not work less when the task was more time-consuming Interestingly, at least some subjects appear to be "target earners," contrary to the assumptions of the rational model The strongest evidence for target earning is an observed preference for earning total amounts evenly divisible by 5, presumably because these amounts make good targets Despite its predictive failures, we calibrate our model with data pooled from both experiments We find that the reservation wages of our sample are approximately log normally distributed, with a median wage of $138/hour We discuss how to use our calibrated model in applications

Abstract: Generally, structural job search models are taken to be stationary. In this paper models are examined in which every exogenous variable can cause nonstationarity, for instance because its value is dependent on unemployment duration. A general differential equation that describes the evolution of the reservation wage over time is derived. As an empirical illustration a nonstationary structural model is estimated that focuses on the consequences of a downward shift in the level of benefits. It appears that the elasticity of duration with respect to the level of benefits after the shift is much larger than the elasticity with respect to the level before the shift. This paper examines the movement of a job-seeking individual's reservation wage over time in a general nonstationary job search model. Also, results concerning comparative dynamics of the reservation wage and the distribution of the duration of unemployment are derived. As an empirical illustration a nonstationary structural model is estimated. The nonstationarity originates from the decrease in the level of benefits when unemployment duration equals two years. From the results some detailed policy recommendations can be deduced, as one is able to distinguish the effect of a change in the level of benefits in the first two years of unemployment from the effect of a change in the level after that period. Recently the use of job search models for the analysis of unemployment duration has become widespread. The reduced-form approach in empirical studies (see e.g. Lancaster (1979)), in which only the hazard of the duration distribution is estimated, is gradually being replaced by a more structural approach. The latter way of modelling is characterized by the explicit use in empirical analysis of the reservation wage equation as stated by the theory. E.g. Yoon (1981), Lancaster and Chesher (1983), Lynch (1983), Narendranathan and Nickell (1985) and van den Berg (1988) use the complete theoretical framework of job search theory to make inferences about search behaviour. However, the structural models used in these studies are stationary. This implies that variables like unemployment benefits or the rate of arrival of job offers are assumed to be constant over the spell of unemployment, which is often at variance with reality. What is more, various reduced-form empirical studies indicate a significant durationdependence of the re-employment probability, which is generally interpreted as evidence in favour of the presence of nonstationarity (see e.g. Blau and Robins (1986), Kooreman and Ridder (1983), Lancaster (1979) and Narendranathan, Nickell and Stern (1985)). Consequently there is a need to model reservation wage movements over time based on a nonstationary theoretical framework.