Individual Wealth, Reservation Wages and Transitions into Employment

In this paper, we investigate the relationship between financial wealth, reservation wages and labour market transitions. According to the theory, higher levels of wealth will result in higher reservation wages and lower employment probabilities. We test for the validity of this assumption by estimating a simultaneous equations model of reservation wages, labour market transitions and wealth. The data used for the analysis relate to a sample of unemployed job searchers drawn from the Dutch Socio-Economic Panel. Wealth is found to have a significantly positive impact on the reservation wage. The overall impact of wealth on the employment probability is negative though small.