Reservation wage

An individual's reservation wage may change over time depending on a number of micro and macro-economic factors, like changes in the individual's overall wealth, changes in marital status or living arrangements, length of unemployment, and health and disability issues. For example, an individual who has high household production activities may have a higher reservation wage, as the wage must exceed the benefit of those activities. This requirement may change once household duties are reduced.

One of the factors an individual's reservation wage is their previous wage. A study done by the Reserve Bank of Australia supports the theory that individuals who have previously worked have reservation wages higher than their previous wage, even if they did not leave their previous work willingly. This same study also found out that people who have not been employed before had higher reservation wages than those who had. This finding could be explained by the fact they do not understand their realistic value in the labor market.

An individual might also set a higher reservation wage when considering an offer of an unpleasant or undesirable job than when considering a type of job the individual likes (see compensating differential). For example, an individual might happily do a sleep study for $10 an hour but would need $40 an hour to work as a bus driver.

There have been many studies on the effect of unemployment duration and benefits on the reservation wages of individuals. With regards to unemployment benefits, as these increase so does the reservation wage; because their non-labor benefits are higher, they place greater value on their leisure time. The rationality principle says that “unemployment benefit income is less than or equal to reservation wages, which are less than or equal to expected wages." Therefore, it makes sense that changes in unemployment benefits have a positive correlation with reservation wages. With regards to the effect of unemployment duration on reservation wages it has mostly been found that "reservation wages decline at a modest rate over the unemployment spell."

It is important to remember that reservation wage is not the only value placed on a job. Individuals may place value on non-wage characteristics, such as the ability to work from home or flexible working hours.

Just as a worker has an incentive to search for a high wage when looking for a job, a consumer has an incentive to search for a low price when purchasing a good. The highest price the consumer is willing to pay for a particular product is that consumer's reservation price.