What is a Reservation Wage?
A reservation wage is the lowest wage which someone will accept for a job. The determination of reservation wage depends on the individual and the given job, and it can make up an important component of the job search. Many people sit down to determine the lowest wage they can take when they start looking for a job, so that they can use this when evaluating job opportunities and job offers.
A huge number of factors can influence reservation wage. One can include the nature of the job. People are often willing to accept less to work in jobs they like because the benefits of the job are viewed as an acceptable tradeoff for the lower wages. On the other hand, people may want more for undesirable jobs. Undesirability can be determined by danger, nature of the work, potential for boredom, and other factors. For example, someone might accept a low wage to clerk in a bookstore to have access to things like an employee discount for books, but wouldn't consider the same wage for working in a retail store which sells sheets, because the job is less desirable or comes with fewer benefits.
For people who are unemployed and looking for work, the reservation wage can vary. As long as people receive unemployment benefits, there is no incentive to take a job which provides less compensation than the benefits. Once those benefits run out, however, if someone does not have a lot in savings, the pressure to find any work at all can be such that the job seeker will accept a lower wage in lieu of not having a job.
People can also consider tradeoffs like lifestyle changes which must accompany a job. For example, a parent who wants to stay at home with children might have a higher reservation wage because the benefits of staying home might be viewed as high, especially if the other parent can provide enough work to support the household. In this case, someone might only accept a job which is both interesting and high paying.
A related term is reservation price. The reservation price is the highest price which a consumer is willing to pay for a good or service. Like the reservation wage, reservation prices can vary depending on a number of situational factors. People are usually willing to pay more for rare items, for example, or for items perceived as being of high quality.
If you work as a freelancer having a reservation wage is very important because people will always try to get you to do work for the cheapest price possible.
For those who are in artistic fields, this can be especially difficult because for many it is difficult to put a price on quality and originality. Often those who work in things like graphic design and illustration must keep their reservation wage firmly in mind, as they often don't have to consider things like benefits, due to their freelance status.
For myself, I have a set hourly fee that is the lowest I will go. Of course, I always start out higher because usually there is some bargaining involved in the process.
I have spent several years teaching abroad and I always have to look at the job market, contracts and the location of where I am working when I consider my reservation wage. The job I currently have pays less than my previous job but I like it a lot more. I think when you have a position that offers you room for contract negotiation you'll really learn what you value when it comes to work.
For myself, fewer hours and more vacation, plus a lot more autonomy in the classroom were highly desired and I was willing to take a pay cut to get it. I think it is a good idea to make a list of job conditions when considering your reservation wage.
@sunnySkys - I think you're right. It is tough out there and sometimes lowering your payment requirements is essential when out on the job hunt. I understand it can be hard for people who have been making high wages to "lower" themselves by taking a lower paying position but sometimes it can't be avoided.
I was watching a documentary awhile back about all these people who are out of jobs in Silicon Valley. Some of them were talking about how they "couldn't possibly" take a job that paid less than 70K a year. However a lot of them had been out of work for a year or more! I wonder if some of them will be singing a different tune in another year or so.
I think a lot of people have probably had to adjust their reservation wage in these difficult economic times. I know a lot of people that have been forced to just take a job, any job, so they could feed their family. Many people don't have the luxury anymore of deciding not to take a job because the pay is too low.
@ginSoul – From that comment, it sounds like you’re a low-wage worker. I’ve been a low-wage worker for the past 10 years. When I apply for a job, I always ask for minimum wage, unless I know the company pays its people more than that.
For a more professional job that requires a lot of experience, skill, or education, I think you’d be able to demand a reservation wage.
For example, if you’re a very effective salesperson applying for a job that doesn’t pay commission, you can ask for a higher reservation wage because you can prove that you’ll bring a lot of money into the company.
If you’re a manager of some sort, with a great track record, you can ask for a reservation wage because you’ll probably save the company more money than they’ll spend on your salary.
Low-wage workers like me often can’t be picky about our wages. Our jobs are usually considered “entry level”, so we’re much more replaceable than someone who has the skills, experience, or education that’s often necessary for a higher wage job.
If you’re easily replaceable, I think setting a reservation wage is out of the question.
I’ve never been asked to suggest a reservation wage when I applied for jobs! I didn’t even know such a thing existed. My reservation wage is my state’s minimum wage, but that goes without saying, obviously. When would someone have the opportunity to put such a demand on a potential employer?
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