Reservation Wage

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.