The determinants of reservation wages

Most theories of involuntary unemployment predict that the equilibrium wage in the labor market will be greater than the reservation wage of the unemployed. These theories concentrate on explaining why the labor market does not clear, with the market wage falling to the level of the reservation wage, as predicted by the classical paradigm. Relatively little, however, has been said about the behavior of reservation wages. This paper seeks to fill the gap in the literature. We look at the empirical determinants of the reservation wage and suggest what this implies for the evolution of the natural rate of unemployment.