The Effects of Savings on Reservation Wages and Search Effort

This paper discusses the interrelations among wealth, reservation wages and search effort. A theoretical job search model predicts wealth to affect reservation wages positively, and search effort negatively. Moreover, the model shows that reservation wages have a negative effect on search effort, thereby also predicting an indirect negative effect of wealth on search intensity. A simultaneous-equation model for wealth, reservation wages and search intensity takes these theoretical results to the data. The data used is a Dutch panel, containing detailed information on individual wealth and income, subjective reservation wages and proxies for search effort. The main empirical results show that wealth has a significantly positive effect on reservation wages, though it has no significant effect on search effort. Since reservation wages do have a significant negative impact on search effort, the wealth-effect on search effort only takes place indirectly, via an increased reservation wage