The Relationship Between Unemployment Spells and Reservation Wages as a Test of Search Theory

Abstract

The theory of stationary job search predicts that, controlling for other factors that affect the probability of leaving unemployment, duration and reservation wages are likely to be positively associated. The paper tests this prediction for British cross-sectional data from 1982 using an estimating equation implied by search theory. Simultaneity is crucial in the evaluation of this prediction, with single-equation and instrumental-variable estimates differing markedly. Perhaps surprisingly, given the extreme paucity of both job interviews and offers in the sample, the main finding is that reservation wages play a significant role in the determination of duration.