Labour Economics Reservation wage
What is the reservation wage? In simple terms this is the lowest rate at which a person will participate in the workforce or highest rate at which an individual chooses not to work.
This may sound peculiar but there in fact many reasons why a person chooses not to participate in the workforce. We are assuming the world is indeed full of rationale people. If a person receives a higher income without participating in the labour force why would he work?
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The person may have an inheritance, professional gambler or lack the skills to gain employment which pays more than the welfare system. There many variables which affect a reservation wage someone?s age, sex, location, health and disability When talking about the reservation wage it is important to remember the compensating differential theory. …
It would be his opinion that unions were not doing him any favours by introducing a minimum wage. Jobs are heterogeneous. They different skill levels for different jobs require different pay. They would be willing to work for a low wage.
With bargaining they could get employment, acquire knew skills become more productive and earn a hirer wage. If firms were to follow the screening hypothesis then unskilled workers would almost be condemned to a life of poverty.
If labour is demand derived a person?s marginal productivity would need to be higher than his wage He would receive a minimum wage. This person may need a higher wage than the above example as its need to be viable for him to work.
The person needs to insure that working this job means he earns enough to pay his rent and provides enough disposable income to maintain the same standard of living they had whilst relying on welfare. This person would require a higher reservation wage than the above. Ho
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