Question

macroeconomics

explain how unemployment insurance, the cost of the job search, and the average of acceptable job offers affects the reservation wage – for each, what happens to the reservation wage when there is a change in the other variable. Explain each mathematically and intuitively.

Answer 1

‘Job’- a term every individual is familiar with and has to come across in his life. Job, also defined as the agreement to contribute to labor for an individual or a firm is reciprocated by a weighted wage which must be acceptable to the labor. Here, labor is the force that determines whether he or she wants the Job or not and then the employer decides whether he or she wants to employ the labor or not. However, with the passage of time, the number of available Jobs in the market are getting lesser which has dynamically affected the position of the Job seekers and their vulnerability to Job desire.

                                              Unemployment insurance is the amount of money paid to the unemployed people by the Government to maintain their survival expenses. The cost of Job search includes a heavy cost as the job seeker, who, if unemployed, needs to spend from his savings to look for the Jobs in various locations, his travel expenses to various job locations, the cost of updating himself with the necessary knowledge to get a Job. Average of acceptable Job offers means, the type of Job offers that are usually received from the employers and the wage offered by them are usually very low or of average nature. All these factors greatly influence the Reservation wage. Reservation wage refers to the minimum acceptable wage rate, conditions of employment and type of job, at which a labor is ready to accept the Job offer. At lower wage than this amount, the labor would not be ready to accept the employment offer. All the conditions mentioned greatly affects the reservation wage, as if there is less unemployment insurance from the Government, the job seeker would be forced to accept a lesser reservation wage. Same goes with the cost of Job search and the average acceptable job offer. If the cost of Job searches go too high and the Job seeker still has not been able to find a Job, he or she will then be forced to accept even a lower offer, as he or she might run out of the savings. Similarly, if the average offers received by a Job seeker are all of very low wage, the Jobs seeker might get forced to accept one of them, as then the job seeker might stop the expectation for a higher pay.

One of these conditions changing with the others remaining constant will make the labor leave the existing job and choose the better one. For example, if the unemployment insurance from the Government side increases, the Job seeker will be in no hurry to accept a low wage offer, Similarly, if the average wage paid by the employers is a handsome one, then the labor will choose the job with the best pay structure. Also , in the case of the cost of job search, if the job seeker has enough amount of money in stock to keep searching for his preferred Job, then he will continue to seek for better Jobs and not accept any Job which is otherwise not desirable to him.