A reservation wage is the lowest wage which someone will accept for a job. The determination of reservation wage depends on the individual and the given job, and it can make up an important component of the job search. Many people sit down to determine the lowest wage they can take when they start looking for a job, so that they can use this when evaluating job opportunities and job offers.
A huge number of factors can influence reservation wage. One can include the nature of the job. People are often willing to accept less to work in jobs they like because the benefits of the job are viewed as an acceptable tradeoff for the lower wages. On the other hand, people may want more for undesirable jobs. Undesirability can be determined by danger, nature of the work, potential for boredom, and other factors. For example, someone might accept a low wage to clerk in a bookstore to have access to things like an employee discount for books, but wouldn't consider the same wage for working in a retail store which sells sheets, because the job is less desirable or comes with fewer benefits.
For people who are unemployed and looking for work, the reservation wage can vary. As long as people receive unemployment benefits, there is no incentive to take a job which provides less compensation than the benefits. Once those benefits run out, however, if someone does not have a lot in savings, the pressure to find any work at all can be such that the job seeker will accept a lower wage in lieu of not having a job.
People can also consider tradeoffs like lifestyle changes which must accompany a job. For example, a parent who wants to stay at home with children might have a higher reservation wage because the benefits of staying home might be viewed as high, especially if the other parent can provide enough work to support the household. In this case, someone might only accept a job which is both interesting and high paying.
A related term is reservation price. The reservation price is the highest price which a consumer is willing to pay for a good or service. Like the reservation wage, reservation prices can vary depending on a number of situational factors. People are usually willing to pay more for rare items, for example, or for items perceived as being of high quality.
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.