Using micro data for the UK and Germany, we provide novel evidence on the cyclical properties of reservation wages and estimate that wages and reservation wages are characterised by moderate and very similar degrees of cyclicality. Several job search models that quantitatively match the cyclicality of wages tend to overpredict the cyclicality in reservation wages. We show that this puzzle can be addressed when reservation wages display backward-looking reference dependence. Model calibrations that allow for reference dependence match the empirically observed cyclicality of wages and reservation wages for plausible value of all other model parameters.

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29 October 2024

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The Review of Economics and Statistics , pp.1?32, 2024

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DOI: 10.1162/rest_a_01523

https://direct.mit.edu/rest/article/doi/10.1162/rest_a_01523/125021/Reservation-Wages-and-the-Wage-Flexibility-Puzzle

This Journal article is published under the centre's Community Wellbeing programme, Labour programme.