Reservation Wages and the Cost of Unemployment

This paper studies direct evidence on reservation wages reported in Great Britain in 1982 to assess (1) whether such asking prices are "high" and (2) whether variations in these reservation wages are related to differences in measures of the subjective and objective costs of unemployment. A majority overall (and for various subgroups) reports reservation wages no higher than own past wages adjusted for earnings growth, but there is nonetheless considerable dispersion in the ratio of reservation to past wages. Reservation wages are somewhat related to measures of the differential cost of unemployment, most clearly for men, although the independent role of benefits is often imprecisely measured. However, exactly which of these costs matter differs significantly according to whether the separation from last employment was voluntary or involuntary.