Reservation fee

Reservation wage is a term used in microeconomics , derived from the English “reservation wage”, but also called an entitlement wage . It describes the wages for work for which an employee is just ready to offer his labor. If the wage is below the reservation wage, the individual no longer offers any labor.

Basic idea

The idea behind the reservation wage is that leisure time is an economic good for the employee and that the employee weighs up a trade-off between those goods that he could acquire for wages and the leisure time that he has to sacrifice for wage work.

With a wage equal to the reservation wage, the employee is indifferent between starting work and leisure time. Work can therefore only be expected if the wage offer is greater than or equal to the reservation wage.

The reservation fee is to be seen as a special case of the reservation price.

Market wage rate and reservation wage

The decision of the individual as to how much work to offer or even whether to offer work is illustrated by the following comparison between the market wage rate and the reservation wage . ${\displaystyle W}$ ${\displaystyle W_{R}}$

The market wage rate is determined exogenously here and includes schooling, professional experience and the regional and professional labor market situation ; these are combined in the line vector . The individual is with defined and is the column vector , of the coefficient of the influence of the individual on reflected. Hence the market wage rate can be named like this: ${\displaystyle XM}$ ${\displaystyle i}$ ${\displaystyle \beta }$ ${\displaystyle XM}$ ${\displaystyle W}$ ${\displaystyle W_{i}}$

${\displaystyle W_{i}=XM_{i}\cdot \beta }$

It is assumed that the individual distributes his time to the maximum. It sells its time in the labor market or consumes it itself as leisure, housework, child-rearing or education.

Thus the individual assigns a certain value to each of these two distributions of time, for the time at work this is the market wage rate and for the non-working time it is the opportunity costs of work, i.e. H. is the value from the use of this time, e.g. B. Leisure. ${\displaystyle W}$

The individual now compares the value of an hour worked with the value of an hour not worked and decides whether to work at all or to work an hour more, it will only do this if the market wage rate is higher than the value of the non-working hour.

Consequently, the reservation wage is now from the level of the value of the non-working time, from since it is no longer worthwhile or even to go to work, i. H. From what level of wages does the individual offer his work and thus forego his free time. Analogously to the market wage rate, the reservation wage can be named as follows:

${\displaystyle W_{i}^{R}=XR_{i}\cdot \beta ^{R}}$

The condition that the individual now offers work is now:

${\displaystyle W_{i}>W_{i}^{R}}$

Or the individual working hours are also defined, then the following decision situation arises: ${\displaystyle H_{i}}$

• ${\displaystyle H_{i}=0}$for , d. H. the individual does not offer any working hour if the market wage rate is less than or equal to the reservation wage rate. ${\displaystyle W_{i}\leq W_{i}^{R}}$

• ${\displaystyle H_{i}>0}$for , d. H. the individual makes his time available for work when the market rate is greater than the reservation rate. ${\displaystyle W_{i}>W_{i}^{R}}$

The decision to participate in the labor market

The graph on the right shows how the hourly wage changes with the hours worked by a worker. The worker only starts to work at the reservation wage and at the 80th hour the hourly wage increases enormously, which means that the worker does not care how much he would get for another hour in wages; she stops working from the 80th hour.

Reservation wages and unemployment

An increase in security against unemployment (better unemployment insurance; the risk of unemployment decreases) increases the reservation wage, i.e. the minimum wage for which an employee would be willing to work. If the risk of unemployment increases (ALG is reduced), the employee is more and more willing to work for less wages because the best alternative, the lower unemployment benefit, becomes less attractive.

In the case of older job seekers, the reservation wages fall the longer they search, because the companies offering jobs can become fewer and fewer, the employment phase is also getting shorter and the willingness to take risks decreases. This means that long-term unemployed people also have a lower reservation wage than other job seekers. Even so, these find hard work; this can either be due to decreasing search intensity or due to the loss of human capital .

Until now only the job seeker has been considered, now the focus is on the employer. This has two criteria for the search for employees:

• the search for suitable workers
• the selection process to identify the most productive workforce

As with the job seeker, the search steps are limited by search costs. Unfilled positions and the duration of the selection process also result in opportunity costs in the form of lost profits. For job seekers it was the reservation wage, for employers it is a minimum qualification that is required. The employer then offers a job to an applicant if his qualifications are greater than the required minimum qualifications.

example

The company "Mineralwasser GmbH" needs one person for the pump house to extract mineral water. There are 2 applicants for this position: Olli and Lutz. Olli, a very qualified man, would work for 20 € / hour, below this amount he would only devote himself to his hobby. Lutz is an incompetent guy, he would work for from 4 € / hour.

As a result, the reservation wage at Olli is € 20 / hour and at Lutz € 4 / hour, is the beginning of their individual job supply curve .

What should the company pay?

If costs were to be minimized, the GmbH would set 4 € / hour and hire Lutz, since Olli is not available for the wages .

But if the GmbH knows about the high qualifications of one of the two applicants without being able to assign them to one of the two men. The GmbH can now offer a wage rate of 20 € / hour and Olli and Lutz would apply, the GmbH now has a 50% chance of getting the more qualified from a random selection. At a lower wage rate, the GmbH would get the incapable with 100%.

This example shows that when there is an oversupply of applicants, a company is tempted to lower its wage rate; however, it signals a negative change in the quality of the workforce or applicants. Another disadvantage is that there is a patchy flow of information about productivity and reservation wages of the worker. A company only knows the distribution of productivity; she knows that the reservation wage varies positively with the performance of the individual applicant.

literature

• Wolfgang Franz : Labor Economics . 5th completely revised edition. Springer, Berlin et al. 2003, ISBN 3-540-00359-2 , ( Springer textbook ).
• Hans Peter Grüner : Economic Policy. Fundamentals of allocation theory and political-economic analysis . 3rd improved edition. Springer, Berlin et al. 2008, ISBN 978-3-540-75796-2 , ( Springer textbook ).
• N. Gregory Mankiw : Fundamentals of Economics . 2nd revised edition. Schäffer-Poeschel, Stuttgart 2001, ISBN 3-7910-1853-1 .
• Elke Maria Schmidt: Company size, employee development and remuneration. An econometric analysis for the Federal Republic of Germany . Campus Verlag, Frankfurt am Main et al. 1995, ISBN 3-593-35341-5 , ( Studies on Labor Market Research 9), (At the same time: Hannover, Univ., Diss., 1994).
• Joseph E. Stiglitz : Economics . 2nd Edition. Oldenbourg, Munich et al. 1999, ISBN 3-486-23379-3 , ( International standard textbooks in economics and social sciences ).
• Thomas Wagner, Elke J. Jahn: New labor market theories . 2nd completely revised edition. Lucius & Lucius, Stuttgart 2004, ISBN 3-8252-8258-9 , ( UTB Economics 8258).

supporting documents

1. ^ ^{A b c} [Franz "Arbeitsmarktökonomie 5th edition, Springer Verlag 2003]
2. ^ [Franz "Arbeitsmarktökonomie" 5th edition, Springer Verlag 2003]
3. ^ ^{A b} [Schmidt "Company size, employee development and remuneration" 1st edition, Campus Verlag 1995]
4. ↑ ^{a b} [Mankiw "Grundzüge der Volkswirtschaftslehre" 2nd edition, Schäffer-Poeschel Verlag Stuttgart 2001]

Web links

• The IAB information platform Wage Expectations of the Unemployed of the Institute for Employment Research, Nuremberg, documents scientific findings on the subject of "reservation wages ".