The Impact of Liquidity Constraints on Job Seekers’ Reservation Wage

Giovanni M. Topa, Columbia University

I use novel data from the Survey of Consumer Expectations, conducted by the Federal Reserve Bank of New York, and data from the Survey of Unemployed Workers in New Jersey, both of which directly elicit individuals’ reservation wages to study the effects of being liquidity constrained on reservation wages. I find three important facts: (1) liquidity-constrained unemployed workers have reservation wages almost 25 percent lower than non-liquidity-constrained unemployed workers on average; (2) liquidity-constrained individuals engaged in on-the-job search have reservation wages about 6 percent lower than non-liquidity-constrained individuals engaged in on-the-job search on average; and (3) there are small but statistically significant within-person effects of liquidity-constrained status on reservation wages. I adapt a standard McCall search model to allow for liquidity constraints and find that the predictions of the model match the empirical results qualitatively.

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