Wage Inequality, Reservation Wages and Labor Market Participation

Abstract

This article presents an analysis of the variation of gender-specific labor-market participation rates across regions. A search-theoretical model with intertemporal optimization behavior of agents suggests that a higher regional wage level fosters participation, whereas higher unemployment discourages workers. The authors extend the standard model by introducing two measures of dispersion, one for the spread below and one for the spread above the median. It is shown that wage dispersion in the lower tail of the distribution decreases the value of search and leads to lower participation rates, although the reverse is true for wage dispersion in the upper tail. These implications of the model are tested using spatial econometrics.