Reservation Wage

  

Categories: Econ

Reservations. Not the kind you make at Applebee's on a Friday night.

Say you’re working at a HubbaLubba bubblegum shop. You notice MumboJumbo—a competitor—has opened up down the street. It’s pretty similar to HubbaLubba in nice-ness and size. They’re hiring, you notice. Maybe you’ll apply? Nope, never mind...you’d have to take a pay cut. No thanks.

A reservation wage is the lowest wage a worker is willing to take for a certain job. If there’s another workplace with similar conditions but lower pay, the workers won’t apply. It’s the lowest you’re willing to go...the lowest wage you’d take.

Since the Great Recession, times have been tough for people, causing lots of people to do free work. They’re either doing free internships, or taking on some free work to try to prove their skills. Their reservation wage...is zero. Which is a problem. If your employer sees they’re gaining value from you at zero cost, why would they start paying you all of the sudden? You already showed them that your reservation wage is zero. Rut-ro.

In general, people’s reservation wage for specific jobs might go down during hard times. Recessions, being unemployed for a while, divorce, moving, health issues...you know, life. On the flip-side, people will raise their reservation wage if their skills are increasingly valuable in the marketplace. Similarly, people might have a higher reservation wage for less desirable jobs or less desirable workplaces...tradeoffs. Grab some HubbaLubba and think on it.

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Econ: What are Wage Rates?5 Views

00:00

And finance Allah shmoop What are wage rates Oh all

00:07

right You probably think about wage rates as it relates

00:10

the compensation all the time When you pick a major

00:14

you check out the wage rates for the potential jobs

00:17

and then run screaming away as fast as you can

00:20

from majoring in English and history and philosophy When you

00:24

search for a job wage rates are among the first

00:26

things you look for right Quite simply a wage rate

00:30

represents the amount of money Ah worker gets paid per

00:33

unit of time and usually that unit is an hour

00:36

or well Maybe it's a yearly wage or a monthly

00:39

wage Some like that So you make twenty bucks an

00:41

hour Or maybe your deal with your employers is that

00:44

you get paid forty grand a year Well your wages

00:47

could also come in other varieties like some people make

00:50

a monthly wage or a weekly wage or a daily

00:54

wage right The point is that you earn a certain

00:56

amount for a certain amount of work performed in economic

00:59

terms The way Drake equates to the price of labor

01:02

It's Aki cost for any business So economists look att

01:05

the wage rate as Aki input to production Right Because

01:09

high wages mean the producers have to raise prices keep

01:13

the same profit margin So think about that From the

01:15

company's perspective it's a direct relation and productivity or how

01:19

productive they are in producing profits for shareholders You look

01:23

at it from the other side the cheaper the cost

01:25

to produce something the higher the productivity of that company

01:29

or at least the capital deployed in it Also the

01:32

wage rate impacts the amount that consumers have to spend

01:36

So the wage rate plays into consumer spending in the

01:39

economy as well and kind of tickles inflation there every

01:42

now and then right So they have tons of wages

01:44

and they're willing to spend that extra dollar on conveniences

01:48

like home delivered whoopee cushions Well yeah whoopee cushion delivery

01:53

Alright well like the price for anything else The price

01:55

for labor gets determined by market forces generally supply and

02:00

demand So the wage rate for any profession and set

02:02

by the supply of people willing and able to do

02:04

that job and by the need for that job to

02:06

be done all right in the subtext there is if

02:08

a job isn't really needed And like St Blowers and

02:13

it turns out the minimum wage is twenty eight dollars

02:15

an hour Well taxpayers probably happily live with leaves all

02:19

over their street rather than pay a fortune for people

02:21

to blow him off And I'll just wait for the

02:22

next windstorm right You don't really need that job but

02:26

no fireman you know you need them and a surgeon

02:29

in the hospital Yeah you need them Well the amount

02:32

of people are number of people who can do the

02:34

job represent the supply supply of Labour The need for

02:38

the job represent the demand for it That's why people

02:42

who design advanced algorithms for offshore tax optimized emerging market

02:46

bond trading make so much money It's a really hard

02:49

boring job You need to go to school for a

02:51

really long time probably speak a few languages and well

02:55

frankly not many people can get through all the rigorous

02:58

training to do that job Well extremely low supply and

03:02

demand is massive Right sky's the limit Well Meanwhile the

03:06

pay rate for side of the road windshield squeegee professionals

03:10

is very low Pretty much anyone with arms Khun do

03:14

it and no one is really looking to get it

03:17

done Economists also look att wage levels on a broad

03:19

scale looking at a national or societal level Think about

03:23

the price for labor like the price for it Well

03:25

pretty much anything else If there's a lot of labor

03:28

available prices will be lower at least notionally low If

03:31

labour is scarce prices will be higher Okay let's look

03:35

at a few historical examples Europe Just after the black

03:39

death people go months without taking a bath And well

03:43

if you get out of line you might get burned

03:45

as a witch Meanwhile somewhere between a third or half

03:48

the entire population just died of a disease that caused

03:52

the black bulb to grow throughout your groin Bottom line

03:56

thanks to the plague Well there were not many workers

03:59

around so wages skyrocketed changes so momentous that it basically

04:04

undermines feudalism forever Okay now the opposite example America In

04:09

the late eighteen hundreds immigrants are pouring in from Europe

04:13

Meanwhile agricultural efficiencies air making farm workers way less necessary

04:18

like machines do the work of ten workers So people

04:20

are moving from countries side There he is like that

04:24

into city side areas Well there's lots of labour available

04:28

and as a result wage rates are very low so

04:31

low that people can barely live on them They live

04:34

in these crowded tenement things or company towns Ah whole

04:37

political movement gets created Teo Try to make life better

04:40

for those workers toiling away Lawmakers passed the minimum wage

04:45

the eight hour work day child rights protection thing so

04:49

kids don't have to work all day and not go

04:51

to school And other protections happened to okay so let's

04:54

look at the demand side of the equation Fast forward

04:56

about a hundred years or sell America in the second

04:59

decade of the twenty first century Automation computers and robots

05:03

have taken over a lot of professions will Meanwhile cheap

05:07

shipping costs and improve communications make it possible to outsource

05:10

unskilled labor toe overseas locations like China There's not much

05:14

demand for certain kinds of workers in the U S

05:17

Till wages don't increase Even though consumption goes up We

05:21

don't need a CZ many American workers to produce more

05:23

stuff It's also important Keep in mind that the way

05:26

compensation takes place has changed over time In the robber

05:30

baron days of old Well Worker got his twenty five

05:33

cents for a fourteen hour day and then had to

05:35

fend for himself for pretty much everything else like socking

05:39

away money for retirement health care benefits and other things

05:42

like that Yeah well nowadays most companies offer a wide

05:45

range of benefits like cash salary But then it cost

05:48

the company more money to pay for health insurance and

05:51

awesome more money toe add for a one K contributions

05:54

and they give other perks and other add ons These

05:57

don't figure in tow wage rates but they do figure

06:00

into company labor costs to remember the next time some

06:03

government worker quotes you that they only make forty eight

06:06

grand a year asked them how much they get in

06:08

pension and health care and all that and it's likely

06:10

something like another fifteen or twenty grand a year so

06:13

they don't really make forty eight grand a year They

06:15

make more like sixty eight or seventy grand a year

06:18

and you can feel less sorry for Well the wage

06:20

rate can also be influenced by regulatory factors The most

06:24

obvious of these is the minimum wage Remember those slums

06:28

from one hundred years ago Well in order to avoid

06:30

those situations governments will often set a minimum wage A

06:33

business can't offer a wage legally below this level So

06:37

as of two thousand eighteen federal minimum wage was seven

06:40

and a quarter an hour But many areas have much

06:43

higher threshold For example Washington D C Has a minimum

06:46

wage of twelve fifty an hour while Washington State had

06:49

a floor on its hourly wage in eleven fifty Well

06:51

the impact of minimum wages aren't always predictable They raise

06:55

some people's overall wages above a living level But they

06:58

also encourage businesses Teo turn toward automation or just shrink

07:03

the workforce like think about a restaurant is barely breaking

07:06

even and now suddenly the minimum wage as fifteen percent

07:09

of labor costs And so instead of having ten workers

07:12

maybe they can get away with nine or eight And

07:15

they just put the ipads up at every table so

07:18

people can just order their dinner through clicking on their

07:20

iPad And they can fire a worker well Meanwhile changes

07:23

in wage rates impact other economic indicators as well Specifically

07:27

higher wages can feed into inflation as workers get paid

07:31

more cos look to make up the additional expense They

07:34

raise prices for customers which feeds the overall increase in

07:38

inflation And as a result an overall increase in wage

07:42

rates don't always equate to a one to one benefit

07:44

for workers if the higher wages lead to increased inflation

07:48

While the buying power of the increased income might not

07:51

be all it's cracked up to be another factor When

07:53

considering a wage while bonuses versus salary that's another thing

07:56

It's another structure Many jobs come with a base salary

07:59

which might be nominally pretty low but they come with

08:02

commissions or bonuses based on performance And those Khun B

08:05

Way more meaningful than the salary Well if you're looking

08:07

to become a gold two salesmen you might not get

08:10

a big guaranteed salary But wow the commissions can be

08:13

huge So as you think about your career in the

08:15

type of wage rates or wage structures you're looking for

08:19

remember it's not the money It's all about what that 00:08:22.203 --> [endTime] money can buy

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